Europe’s Populists at the Gate

Barry Eichengreen

09 November 2012
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LONDONIs Europe’s crisis over? Investors, policy analysts, and even officials are quietly beginning to suggest that this might be the case. The euro has strengthened by nearly 10% against the dollar since European Central Bank President Mario Draghi vowed on July 26 to do whatever it takes to hold the currency together.



 
Similarly, the Euro VIX, a popular measure of expectations of euro volatility, has fallen significantly. The cost of buying protection against fluctuations in the euro/dollar exchange rate declined last month to its lowest level in nearly five years.


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Borrowing costs for the Spanish and Italian governments have similarly fallen dramatically.
A consistent narrative underpins this change in market conditions.




European leaders have put in place mechanisms to support Italy and Spain. As of October, the continent has an operational European Stability Mechanism to purchase new Italian and Spanish government bonds if investors go on strike.


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In parallel, the ECB has announced an “outright monetary transactions” (OMT) program to purchase bonds already trading on the secondary market. At their most recent summit, European Union leaders reiterated their commitment to finalize the design of a single supervisory mechanism by January 1, 2013, and to activate it by the end of next year.


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These steps, it is argued, have taken both sovereign-default risk and a banking crisis off the table. With the ESM and ECB capping interest rates on government bonds, countries will have as much time as they need – and they will need plenty – to reduce their debt burdens to manageable levels. And, with a single supervisor in place, the ESM will be permitted to inject capital directly into troubled banks. The new banking union can then be extended to include a common resolution fund to enable the orderly dissolution of insolvent institutions.



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To be sure, there are some gaps in this narrative. The ESM has limited firepower, and, along with the ECB, will buy only the bonds of governments that ask, something that proud leaders are reluctant to do. The end-2013 deadline for implementation of the banking union is a long way off. Even if there is agreement on the need for a common resolution fund – which is not clear – there is no agreement on how to pay for it. Nevertheless, the markets evidently regard this as a comforting bedtime storyall the more so now that European leaders have averred that Greece will not be pushed out of the eurozone.



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Officials recognize that cutting off EU support and compelling the ECB to stop providing credit to the Bank of Greece would be Europe’s Lehman Brothers moment. The consequences could be catastrophic, not just for Greece, but also for Portugal, Spain, Italy, and who knows whom else.




In their October 18 communiqué, eurozone leaders stated in no uncertain terms that they are not prepared to go there. Given Europe’s facility at creative accounting, some way will be found to keep Greece on life support.




So, is the crisis really over? In focusing on summit declarations and promises of far-reaching reforms of EU institutions, investors are missing the real risk: the collapse of public support for, or at least public acquiescence to, the austerity policies required to work down heavy debt burdens – and for the governments pursuing these policies. Mass anti-austerity protests are one warning sign. Another is growing popular support for neo-Nazi movements like Golden Dawn, now the third-largest political party in Greece.
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The rise to power of a “rejectionistEuropean government – that is, one that unilaterally rejects the policy status quo – would immediately bring the crisis to a head. A Greek government that summarily rejected conditions set by the EU and the International Monetary Fund would immediately be cut off by the ECB and forced to exit the euro. A Spanish government that did likewise would lose all prospect of support from the ECB’s OMT program, and the markets would quickly pounce.
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Some will object that dire warnings of political reaction are overdrawn. So far, no country has voted into power a rejectionist administration. Even in Greece, where conditions are the worst, Golden Dawn is still a minority party. The answer to these critics is, unfortunately, “just wait.” It is worth recalling that nearly four years passed from the onset of the Great Depression in Germany to the Nazis’ accession to power.
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Europe needs a growth strategy to put this political genie back in the bottle. It needs policies that hold out the promise of lower unemployment and better times. The continuing absence of such policies is the gravest threat to the euro. Unless that changes, markets will wake up to that risk perhaps with a joltsooner or later.
 
 
 
 
 
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Barry Eichengreen is Professor of Economics and Political Science at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His most recent book is Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.



November 8, 2012 7:16 pm
 
Europe: Stretched at the seams
 
Separatist movements raise questions about the EU
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people opposed to the independence of the Catalonia region of Spain, hold Catalan and Spanish flags during the holiday known as Dia de la Hispanidad, Spain's National Day in Barcelona, Spain, Friday, Oct. 12, 2012. Spain is in recession and under pressure to fix its finances while celebrating the day Christopher Columbus discovered America in the name of the Spanish Crown©AP
Divided they stand: Catalan and national flags aloft in Barcelona in October. Catalans favour a vote on independence despite Madrid’s warnings it would be illegal






Under the pressures of recession, fragile public finances and political grievances that have smouldered for decades, if not centuries, Europe is witnessing a rise in separatism and regionalism that is testing the resilience of well-established states. Independence movements in Scotland, Catalonia and Flanders are capturing votes and the public imagination as they seek to break away or gain more autonomy from Spain, Belgium and the UK.




Europe is facing an economic crisis. This crisis is causing stress in the vicinity of long-buried faultlines. The blame game is in full swing,” John Bruton, a former Irish prime minister, wrote in The Irish Times last month.


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In late 2014, Scots will vote in a referendum that will either confirm or reject the 1707 Act of Union with England. Catalans want to hold a similar ballot, in spite of warnings from the Spanish government and parliament that it would be illegal. Belgium, Europe’s most decentralised state apart from dysfunctional Bosnia-Herzegovina, seems set on a path that will disconnect its Dutch-speaking majority still more from its francophone community, though not necessarily by dissolving the Belgian state.




In all three countries, the central state and its outlying nationalities and regions have struggled since the 1970s to find a lasting formula for the distribution of power. Spain and the UK are not federal states but countries where improvised political solutions have bestowed varying degrees of self-rule on different areas, imparting a lopsided and contested quality to the overall settlements.




Belgium has a more classical federal structure, which is reflected in the country’s division into three regions and three linguistic communities (a small German-speaking population, as well as Dutch and French). But the Flemish and francophone Walloons have been revising it for 40 years in a fruitless search for equilibrium. Arguably, the only large European country with a balanced federal system is Germany.




In Italy, a crop of corruption scandals at regional and provincial level has cast a poor light on the nation’s experiment in decentralised government. The Italian economic crisis has meanwhile fuelled regionalist sentiment in the affluent Alpine region of South Tyrol.




To some non-European eyes, secessionism presents a curious spectacle in that Europeans themselves tend to argue that the solution to their economic, debt and banking crises lies in a more integrated Europe. But the Catalans and Flemish see no contradiction between the pursuit of national sovereignty and adhesion to a more closely united Europe – and, even if the Scots have no desire to join the eurozone, they certainly wish to stay in the EU.





In any case, the inescapable reality is that restive national minorities and regionalist parties are to be found in abundance all over the continent. The European Free Alliance, a Brussels-based coalition of more than 40 nationalist and autonomist parties, contains Alsatian and Corsican movements from France, Frisians from the Netherlands, Italians from Croatia, Poles from Lithuania, along with many others.
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Some of these movements seek more extensive self-government rather than outright secession. Some seek unity with co-nationals in a neighbouring state. Even those that want a state of their own are tactically flexible enough to settle, in the near term, for something short of full independence.
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All draw inspiration from the knowledge that, in the past 100 years, the geopolitical map of Europe has been anything but fixed. Recent additions to the list of states include: Montenegro, which lost its independence in 1918 and regained it in 2006; and Kosovo, which declared independence in 2008, though five of the EU’s 27 states have withheld recognition.





Pro-independence sentiment in Spain and other parts of Europe has also grown stronger because some separatist parties have grown more adept at selling their message,” says Tomas Valasek of the Centre for European Reform, a UK-based think-tank.




For some EU governments, the disappearance of familiar states would be troubling. Policy makers in Dublin, for instance, fear Scottish independence would destabilise the delicate power-sharing arrangements in Northern Ireland by reinvigorating the Sinn Féin-backed cause of an all-Irish state.





For the EU as a whole, secessionist movements present something of a conundrum. The bloc’s treaties contain provisions that permit a country to join or leave. But they are silent on whether a region detached from a “mother state” has an automatic right to membership. The best guess is that no such right exists but that it would be hard to keep out a newly independent democracy for long. Caution is advisable, however. There are, quite simply, no precedents.




Scotland: Inherited EU status in doubt




To the discomfort of secessionists, Scotland had no sooner won the UK government’s agreement last month to a referendum on independence than the crucial question of EU membership reared its head. Opinion polls this year indicate support for full separation is at about 30 per cent. But if EU membership were in doubt, it would be a less attractive proposition.




It emerged last month that, contrary to his earlier suggestions, Alex Salmond, first minister and leader of the Scottish National party, did not possess private legal advice confirming that a breakaway Scotland would have no problem inheriting membership. In fact, gaining swift re-entry might prove difficult – particularly if Madrid, faced with Catalan secession, chose to treat the case as a precedent that presented a threat to Spanish unity.
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The UK government stated on November 1 that, based on the formal advice of its law officers, an independent Scotland would have to apply for EU admittance as a new state. It would then have to negotiate terms with all other 26 members, including the residual UK.
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This would cover matters such as the EU budget, where the UK benefits from a rebate, and membership of the eurozone and Schengen border-free travel zone. It looks unlikely Scotland would automatically inherit the right to exclude itself from these fundamental areas of European integration.





Nevertheless, if the 2014 referendum produced a clear vote in favour of leaving the UK, the EU would be under pressure to negotiate Scotland’s terms of membership speedily before the planned date of independence. If it produced a No result, the SNP might focus its attention on increasing the autonomy granted to Scotland in 1998.
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Flanders: Independence demands deferred
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In 2006, a Belgian television station ran a spoof report that Flanders, the nation’s Dutch-speaking half, had declared independence. Thousands called an emergency phone number for more information. Several ambassadors in Brussels sent urgent messages to their national capitals.
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At first sight Flemish secession now seems an even more realistic possibility than six years ago. The New Flemish Alliance (NVA), the region’s leading nationalist party, won municipal elections last month. Party leader Bart De Wever won in Antwerp, a Socialist stronghold since the 1930s.



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Yet Mr De Wever is not demanding independence right away. He wants constitutional changes that will turn Belgium into a loose confederation. He imagines the state will eventually evaporate but is vague about how.
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Belgium was created in 1831 as a combination of francophone and Dutch-speaking communities that remain largely separate. Modern Flanders is one of Europe’s most prosperous regions, and its nationalists caricature francophone Wallonia as a swamp of boneheads and welfare addicts. The Walloons see the Flemish as humourless money-grubbers.
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Breaking up Belgium would require an agreement on Brussels, the French-speaking capital surrounded by Flanders, but neither Walloon nor Flemish nationalists will let the others grab it. To detach it from both regions and declare it a freestanding European city appeals to neither side.
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Moreover, Europe’s financial crisis has shown that the Belgian state, however unloved, still serves a useful purpose. It was government ministers and regulators, not regional leaders, who played the vital role in co-ordinating rescues of the Fortisand Dexia banking groups.





Catalonia: Popular pressure for secession





A snap election in Catalonia on November 25 appears certain to produce re-election for Convergència i Unió, the ruling nationalist party. Whether this triggers a referendum on independence and leads to Spain’s break-up is an altogether different question.





Under Spain’s 1978 constitution, regions are permitted autonomy but have no legal right to full independence. Opinion polls indicate that about 80 per cent of Catalonia’s 7.5m people want a referendum, and that about half would vote in favour of secession. Support for a referendum is so overwhelming that some Catalan politicians warn of a serious confrontation if Madrid refuses to modify its view that such a vote would be illegal.
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Significantly, however, Artur Mas, Catalonia’s CiU president, seems in no hurry to hold one. This month he suggested merely that it should take place “in the next four years”. If cool heads prevail on both sides, there should still be enough time for a compromise.
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Underlining the limits on Mr Mas’s freedom of political manoeuvre, Cataloniashut out of international debt markets – asked in August for €5bn in liquidity assistance from the Spanish state. The region might have to settle for an updated model of autonomy, perhaps involving more regional control over tax affairs as in the Basque Country.
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According to the latest opinion polls, a deal along these lines would cause support for independence to drop by 10 percentage points to 43 per cent. What remains unclear is whether the Spanish rightnow in power in Madrid, and historically associated with centralisation – would be pragmatic enough to strike a deal.





South Tyrol: Agitation in a Germanic enclave
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With low unemployment and no public debt, the northern Italian province of Alto Adige – in German, Südtirol – seems distant from the economic crisis gripping the country. Enhancing this sense is the Austro-Germanic flavour of life: ethnic Germans account for two-thirds of the province’s 510,000 people, and the German-speaking South Tyrolean People’s party (SVP) has swept every election since 1948.
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Luis Durnwalder, the province’s SVP governor since 1989, scorns talk of secession as “an unrealisable dream”. He says South Tyrol’s autonomous status inside Italy serves it perfectly well. But provincial elections are due next year, and the moderate Mr Durnwalder is bowing out of politics.
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Coupled with the crisis, this creates space for militant politicians. They denounce Rome for seeking a bigger contribution from South Tyrol to shore up national public finances. This proposal threatens to undermine the deal under which the region retains 90 per cent of the taxes it collects.
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Separatists such as Eva Klotz, a leader of the South Tyrol Freedom party, which wants the region to secede and merge with Austria, agitate for a referendum on self-determination as early as next year. This seems unlikely because national politicians’ priority will be Italy’s parliamentary elections, due in April, the formation of a government and the selection of a head of state.
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If Italy’s eurozone membership and economic stability were to come under serious threat, the mood in South Tyrol might turn more radical. But outright secession would run up against the obstacle that ethnic Italians make up a quarter of South Tyrol’s population and dominate Bolzano, the provincial capital.
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Copyright The Financial Times Limited 2012.



Is Santa Coming Early for Gold and Gold Mining Stocks?
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By Chris Vermeulen
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OCT 30, 2012 3:00 PM
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Gold is likely to take another run at the $1,800 level and GDXJ will likely test its previous high of $25.50 at minimum.

 

 




If you own physical gold, gold mining stocks, or plan on buying anything related to precious metals before year end, you are likely going to get excited by what my analysis and outlook shows.
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Since gold topped abruptly a year ago (September 2011) with a massive wave of selling that sent the price from $1920 down to $1535, technical analysts knew that the type of damage that had be done to the chart pattern could take a year or more to stabilize before the yellow metal would be able to continue higher.





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Fast-forward 12 months to today. You can see that gold looks to have stabilized and is building a basing pattern (launch pad) for another major rally. The charts illustrated below show my big-picture analysis, thoughts, and investment idea.




Weekly Spot Gold Chart:
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The weekly chart can be a very powerful tool for understanding the overall trend. This chart clearly shows the last major correction and basing pattern in gold back in 2008-2009. Right now gold looks to be forming a very similar pattern.





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Keep in mind this is a weekly chart, and if you compare the 2009 basing pattern to where we are today, I still feel it could take three to six months before gold truly breaks out to the upside and kicks into high gear. The point of this chart is to provide a rough guide for what to expect in the coming weeks and months.
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Weekly Chart of Junior Gold Miner Stocks
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If you follow gold closely then you likely already know that junior gold mining stocks can lead the price of gold up to two weeks -- meaning, gold mining stocks (which you can track by looking at Market Vectors Gold Miners ETF (NYSEARCA:GDX) and Market Vectors Junior Gold Miners ETF (GDXJ) exchange traded funds) will form strong bullish chart patterns and generally start moving up in price before physical gold.
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The chart below shows the junior gold miner ETF with a very bullish chart and volume pattern. Remember that gold stocks are a leveraged play on gold in most cases. For example, if gold moves up 1% we typically see GDX and GDXJ move 2-4%. Because they act as a leveraged play on physical gold, smart money and big institutions start accumulating these investments in anticipation of gold rising.
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GDXJ has formed a tight bull flag and the volume levels confirm there is big money moving into these investments. The first price target on GDXJ using technical analysis for a measured move points to the $32 area. Looking forward 12 months with gold trading above $2000 we could see this fund more than double in value.
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Bonus: While most traders focus on GDX gold miner fund, I prefer the GDXJ fund because it's almost identical in price performance but it pays you a 5% dividend
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Gold’s Seasonality
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.It’s that time of year again where gold tends to move higher. Below you can see where we are and what the price of gold typically does in November.
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Gold Investing and Trading Conclusion:
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Looking forward one month (November) and factoring in the recent pullback in gold to known support levels along with strong buying of junior gold mining stocks, I feel gold will take another run at the $1800 level and GDXJ will test its previous high of $25.50 at minimum. If both those levels get taken out then a massive bull market for precious metals could be triggered. Only time will tell.

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