A failure to tell the truth imperils Greece and Europe
      
If the IMF pulls out, Europe will be free to mismanage the crisis on its own
       
by: Wolfgang Münchau
    
 


    
Failure to tell truth to power lies beneath much of what is going wrong in Europe right now. It may not be the principal cause of the Greek debt crisis, which is now on its umpteenth iteration.
But it is more than a mere contributing factor.

You notice it particularly at those moments when others speak the truth, as the staff of the International Monetary Fund have done recently. In its latest survey of the Greek economy it states that “public debt has reached 179 per cent [of gross domestic product] at end-2015, and is unsustainable”.

Europeans are not used to such bluntness. The Germans protested. The European Commission protested. So did the Greeks. They all want to keep up the fairy tale of Greek debt sustainability for a little while longer.

They were particularly shocked that the IMF exposed the disagreement when it wrote that “some directors had different views on the fiscal path and debt sustainability”. These were the Europeans, who are now in a minority in the fund.

Once the Trump administration sends its representatives to the IMF board, expect the climate to become even more hostile. My expectation is that the IMF will ultimately pull out of the Greek programme, leaving the Europeans free to mismanage the ongoing Greek crisis on their own.

How did it come to this? In July 2015, the EU and Greece agreed a third bailout. Alexis Tsipras, Greek prime minister, committed himself to running a primary surplus (before the payment of interest) of 3.5 per cent of economic output each year.

No country has ever managed to maintain such a commitment over an almost indefinite period. Greek debt sustainability was thus premised on an obviously unfulfillable assumption. Greece is not only far away from achieving a 3.5 per cent primary surplus. It will never do so.

Another untold truth is that Germany will never forgive Greek debt. This is because the German parliament will not accept it, and the number of MPs hostile to Greek debt relief will be even higher after the September election.

If the German government wanted to accept debt relief measures, it could probably assemble a parliamentary majority today. The “grand coalition” led by Chancellor Angela Merkel commands about 80 per cent of the seats in the Bundestag. But with the September elections, I would expect the Free Democrats, the liberal party, to re-enter the parliament after they failed to clear the hurdle last time. Their leader, Christian Lindner, said last week that the best way forward is for Greece to leave the eurozone, and for Greek debt to be forgiven afterwards.

Alternative for Germany, the rightwing anti-European party, not only wants Greece out of the eurozone, but Germany as well. Together those two parties will probably account for some 20 to 25 per cent of MPs. If you add the large group of Eurosceptics from Ms Merkel’s Christian Democratic Union and its Bavarian sister party, the Christian Social Union, it is not hard to see why the window for debt relief will close permanently this autumn.

What is particularly galling about this story is the complicity of the Greeks themselves. There are no good and bad guys in this story. In the spring of 2015, in the months following Syriza’s election victory, Mr Tsipras’ government took the position that a fiscal surplus of 3.5 per cent is economically counterproductive and politically suicidal.

In the end he chose to cave in to European demands, and accepted the 3.5 per cent target. He then committed the catastrophic mistake of aligning himself with the EU against the IMF, the only institution that advocated debt relief. It was a political miscalculation. He thought the target was soft, like so many other European benchmarks. And he thought he could always compromise with the Europeans on structural reforms. He also miscalculated in assuming that the IMF would be complicit in such a deal.

A much overlooked part of the Greek bailout programme is that Germany made its participation conditional on IMF involvement. That gave the fund leverage. If the IMF now pulls out of Greece, one of two things will happen. Athens will either default on its debt this summer and be forced to quit the eurozone, or Berlin will accept debt relief just a few months before the elections. Either way, this is a fight in which someone ends up on the floor.

The Greek crisis is only the most glaring example of failure to tell the truth. There are many others. Italy’s membership of a monetary union with Germany is also transparently unsustainable. Yet no Italian prime minister has ever mounted a credible challenge to the way the system is governed.

When the truth dies, we should not be surprised if alternative facts are put in its place.


Surplus war

Germany’s current-account surplus is a problem

But not for the reasons Donald Trump thinks it is
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WHAT awkward timing. On February 9th Germany reported the world’s largest current-account surplus, of about €270bn (almost $300bn), beating even China’s. Meanwhile, the country with the world’s biggest deficit remains America, which under its new president, Donald Trump, is browbeating friend and foe alike in the name of putting “America first”. Mr Trump’s economic adviser, Peter Navarro, has even accused Germany of currency manipulation. By his logic, Germany “exploits” America and others because it uses the euro, which is weaker today than the old Deutschmark would be, making German cars, machines and other exports more competitive.

Coming just weeks after Mr Trump casually threatened to slap a 35% tariff on imported BMWs, such talk has Germans’ full attention. His verbal assaults on the rules-based trading order, along with his disdain for NATO and the European Union, strike at the heart of post-war Germany’s identity and national interest, which is to be embedded in Europe and the West as a peaceful mercantile nation. But if Mr Trump thinks the angst he is causing gives him bargaining power over Germany, he is naive.

His administration’s mistake is to attack Germany with flawed logic. Yes, the euro is weak relative to the dollar. But so are other currencies. Germans think Mr Trump has only himself to blame. He has promised huge tax cuts and increases in infrastructure spending, which will drive up interest rates in America, boosting the dollar. Mr Navarro’s suggestion that Germany deliberately attempts to weaken the euro makes no sense. The European Central Bank (ECB) may be based in Frankfurt. But its president, Mario Draghi, is keeping interest rates near zero and buying bonds (in the European version of “quantitative easing”) primarily to stimulate economies outside Germany.

Indeed, German economists and pundits are Mr Draghi’s most vocal critics. They have complained for years that low interest rates rob German savers and ruin German life insurers.

If the government shows restraint in criticising Mr Draghi, that is thanks to another German tradition: respect for the independence of central bankers. When Mr Draghi began loosening monetary policy, “I told him he would drive up Germany’s export surplus,” Wolfgang Schäuble, Germany’s finance minister, told Tagesspiegel, a German newspaper. “I promised then not to criticise this course publicly. But I do not then want to be criticised for the consequences of this policy.”

By choosing the wrong line of reasoning, Mr Trump has unwittingly let the Germans off the hook in a more fundamental debate. After all, Germany’s trade surpluses have been controversial for years.

Long before Mr Trump ran for office, the European Commission in Brussels, the International Monetary Fund in Washington, America’s treasury department and the OECD, a club of mostly rich countries, were already berating Germany for causing imbalances in the European and global economies.

The real German problem
 
Their analysis starts more than a decade ago, when German employers and unions agreed to restrain wage growth. Workers weren’t thrilled, but everyone agreed that Germany was not competitive enough. This amounted to a devaluation of Germany within the euro zone. The best way out of today’s imbalances, economists say, is not to keep cutting wages in down-and-out countries like Greece, but to let them rise in Germany. Wages have been going up—by 2.3% last year—but should grow faster.

The other factor is that Germans, in an ageing society, have for years been saving much more than they invest. Individuals are filling piggy banks for their retirement. And firms, expecting lower returns from older, smaller populations in the future, are investing abroad instead of at home. At the same time, the government, also citing demography, in 2011 adopted a “debt brake”, limiting its new borrowing at just the moment when ultra-low interest rates would make debt service almost free. The resulting excess savings are capital that Germany sends abroad. They are the corollary of Germany’s current-account surpluses.

There is a case that Germany invests too little. Marcel Fratzscher, an economist, estimates this “investment gap” at €100bn annually. Many in the centre-left Social Democratic party (SPD) agree with him. They include Martin Schulz, the SPD’s freshly chosen candidate for chancellor in the election scheduled for September 24th. He has jolted his party in the polls. The SPD is now roughly even with the centre-right bloc of Angela Merkel. Should Mr Schulz win, government spending could rise.

Other German economists, such as Clemens Fuest, doubt that the gap is big. In the 1990s, after reunification, investment soared as eastern Germany got new roads, buildings and plants.

Eventually that exceptional spending had to end, says Mr Fuest, and recently Germany’s investment ratio has been stable. In 2015 it was 19.9%, a bit higher than the EU average. Boosting investment is a good idea, he thinks, but no realistic increase could reverse a current-account surplus that amounts to 9% of GDP.

If Germany really wanted to attack its surpluses, it would have to do something drastic, he thinks, such as lowering value-added tax (making goods cheaper, domestic or foreign) while raising payroll taxes (making only German labour dearer). But that is a non-starter politically.

Another option is for the government to stop saving and start deficit-spending. But that too is anathema in the Berlin consensus. As the German campaign heats up, all sides are instead likely to praise the surplus as a sign of export prowess. Sigmar Gabriel, the foreign minister and a leading Social Democrat, gave a taste of this defiance when he responded to Mr Trump’s tariff threat by taunting America to “make better cars”. One day, when enough elderly Germans actually cash in their savings, German surpluses will turn to deficits. Until then, Germany’s policy stand-off with the world will continue.


Trump’s Gold Lining

Maureen Dowd
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President Trump and Melania Trump having dinner with Prime Minister Shinzo Abe of Japan, his wife Akie Abe, and Robert Kraft, C.E.O. of the New England Patriots, at the Mar-a-Lago resort in Palm Beach, Fla., on Friday. Credit Al Drago/The New York Times
Listen up, haters.
 
The brief reign of Donald the First has been completely head-spinningly nuts so far. But let’s stay calm and look for the silver lining, or in this case, the garishly gold lining.
 
Donald Trump has indeed already made some of America Great Again.
 
Just not the aspects he intended.
 
He has breathed new zest into a wide range of things: feminism, liberalism, student activism, newspapers, cable news, protesters, bartenders, shrinks, Twitter, the A.C.L.U., “S.N.L.,” town halls, George Orwell, Margaret Atwood, Hannah Arendt, Stephen Colbert, Nordstrom, the Federalist Papers, separation of powers, division of church and state, athletes and coaches taking political stands and Frederick Douglass.
 
As Trump blusters about repealing Obamacare, many Americans have come to appreciate the benefits of the law more.
 
Lena Dunham credited the “soul-crushing pain and devastation and hopelessness” of Trump with helping her get a svelte new figure.
Trump may even have pierced the millennial malaise, as we see more millennials showing interest in running for office.
 
Similarly, whenever Trump rants about Alec Baldwin’s portrayal of him and tweets that “Saturday Night Live” is “not funny,” “always a complete hit job” and “really bad television!,” the show’s ratings go up. They’re now at a 20-year high.
 
Trump was roundly mocked for turning his Supreme Court announcement into an episode of “The Bachelor,” but it must be said that the president has more talent for devising cliffhangers than anyone since Charles Dickens.
 
Administration officials told The Times that the White House even got Judge Thomas Hardiman, the runner-up to Neil Gorsuch, to play along and help make the final rose ceremony suspenseful by feinting a drive toward Washington. It was unbelievably schlocky, and yet the end result was a national civics lesson, with a whopping 33 million-plus people tuning in.
 
Ordinarily staid Senate hearings for cabinet choices are now destination TV. As Trump puts forth people who want to plant Acme dynamite in the agencies they will head and as Republicans at the federal and state levels push their conservative agenda, Americans have a refreshed vigor for debating what’s at stake for the environment, education, civil rights and health insurance — and a new taste for passionate, cacophonous town halls.
         
Trump has made facts great again. By distorting reality so relentlessly, he has put everyone on alert for alternative facts.
 
“With great assurity,” as Trump likes to say, the president has also made White House press briefings relevant again by raising the stakes. The Times’s Michael Grynbaum calls Sean Spicer’s live briefings “daytime television’s new big hit” — outdrawing soap operas like “General Hospital” and “The Bold and the Beautiful.” The press must battle every day to wrest the truth from the tangled web of West Wing deceit, delusion and charges of “fake news blah blah blah,” as CNN’s Jake Tapper called it.
 
The astonishing part is Trump’s self-restraint. Given that he used to pretend, with fake names, to be his own press agent, spinning flattering tall tales about himself, it’s amazing he hasn’t started live-tweeting his ameliorations and fashion notes for the hapless Spicer during press briefings. Or pushed Spicer aside and taken the podium himself under the guise of John Barron to assure reporters that the sterling President Trump knows nothing about Michael Flynn’s playing footsie with the Russians.
The pink pussyhats are at the barricades, on the watch for any curtailment of women’s rights and any mansplaining by older white Southern men. There was no way — given the fierce urgency of the Trump resistance — that Mitch McConnell was going to get away with shushing Elizabeth Warren on the Senate floor as she tried to read a letter by Coretta Scott King criticizing Jeff Sessions.
 
The president loves his pat-and-yank handshakes and hugs and blown kisses with male V.I.P.s.
 
“I grabbed him and hugged him because that’s the way we feel,” he said of greeting Japan’s prime minister.
 
But The Times’s Maggie Haberman reports that the White House radiates with the misery of staffers. (And the paranoia of the in-over-his-head megalomaniac holed up alone in the residence.)
 
The riled-up art scene has taken to trolling the Troller in Chief. The Museum of Modern Art dropped its customary detachment on politics to protest Trump’s ban on refugees from seven predominantly Muslim countries by replacing Cézanne, Picasso and Matisse with contemporary art from Iran, Iraq and Sudan.
 
The Public Theater announced it would open Shakespeare in the Park in May with “Julius Caesar,” about a populist seeking absolute power. The play, the theater said, has “never felt more contemporary.”
 

Given the fever pitch on both sides, we’re going to have to pace ourselves, as David Axelrod tweeted.
 
Still, the main way that Trump is proving that America is great is that the affronted and angered are rising up to take him on.
 
Institutions designed to check a president’s power and expose his scandals — from the courts to the comics to the press — are all at Defcon 1 except for the Republican Congress, which seems to be deaf.


The Aging Market’s Meltup Continues

The bull market has gone 84 sessions without a daily decline of 1% or more. How long can that last, given Washington’s chaos?

By Kopin Tan

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Getty Images
 
 
As age-defying stunts go, our mature bull market has gone 84 sessions—and counting—without a single daily decline of 1% or more, notwithstanding an onslaught of executive orders from President Donald Trump, nationwide protests, constitutional confrontations, disquieting headlines, fake news, alternative facts, and the crippling embarrassment that are the New York Knicks. You still think Roger Federer and Tom Brady are such hot stuff? The Standard & Poor’s 500 index hasn’t seen a feat of such stamina and resolve since 2006, and before that, 1995, notes Bespoke Investment Group.

It’s easy to be hypnotized by stocks’ meltup, especially since the market’s calm stands in such stark contrast to Washington’s chaos. But how long can stocks remain an oasis of serenity? 

There are good reasons why a 1% pullback has become as rare as civility in Internet comments sections.

U.S. earnings are ticking up anew, and global economic data is improving. There are even those, like Deutsche Bank strategist Binky Chadha, who argue that stocks’ postelection surge merely reflected the dissipation of uncertainty following tight elections, and not Trump’s promised tax cuts and fiscal spending.

“With little priced in for policy changes, selloffs on any stimulus disappointment should be short-lived,” he writes. Above all, trillions printed by global central banks now sit uncomfortably in bonds and unprofitably in cash, and computerized trading based on patterns established during years of abnormal monetary largesse keeps up the blind buying of pricey stocks.

Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist, says what he calls the market’s three Ps—positioning, profits, and policies—seem “consistent with one last 10% melt-up in stocks and commodities in 2017.” Among the many indicators he watches, the firm’s proprietary bull-and-bear barometer (of fund flows, positioning, and technical data) has risen to a 2½-year high, but is still shy of a sell signal. Fund-manager surveys show institutional cash balances at about 5.1% of portfolios, above a 10-year average of 4.5%. But indicators of market breadth show that 76% of global stock markets today are overbought, quite a change from a year ago when 89% of stock markets were oversold.

“Measuring fear is easier than measuring greed,” Hartnett writes, which is why stock-market bottoms often arrive quickly, but forming a market top can take much longer.

So what are some risks that can eventually test stocks’ mettle? The dissolution of a 35-year bond bull market should worry investors, although it has become easy to overlook that risk as bonds’ selloff slowed, and the yield on 10-year Treasuries began to consolidate near 2.5%. But make no mistake: The unwinding of one of the planet’s biggest bubbles isn’t behind us; in fact, it has barely begun, what with 10-year government bonds yielding just 0.08% in Japan and 0.32% in Germany. Here in the U.S., rates have ticked up from record lows but are still historically benign. Yet auto sales, mortgage applications, and home sales weakened in January, and personal bankruptcy filings are up 5.4%. Meanwhile, foreigners seem less willing to hoover up our bonds, and the level of U.S. Treasuries held abroad just fell below 30% for the first time since 2009.

Next, Trump’s plan to make big changes to our economy also increases the risk of policy error. Will bullying corporations from venturing abroad really overcome the structural changes wreaked by automation and globalization? According to Goldman Sachs’ economists, less than 2.5% of layoffs from 2004 to 2012 were due to the relocation of jobs abroad. U.S manufacturing actually has become more competitive since 2000, but the decline in manufacturing’s share of all jobs has merely slowed, not reversed. Besides, Americans have also benefited from global trade—prices we pay for durable goods have declined since 1995. And emerging markets don’t just sell us stuff, their burgeoning middle classes are some of our fastest-growing customers. Apple (ticker: AAPL), for instance, earns a quarter of its revenue from emerging Asia, while Boeing (BA) earns 30% from emerging markets.

MEANWHILE, CHINA’S STOCKPILE of foreign-exchange reserves has shrunk to $2.998 trillion from nearly $4 trillion as recently as 2014. This puts Beijing in a increasingly tight spot: Should it keep spending its dwindling reserves to prop up its currency and maintain a stable exchange rate, or should it just let the yuan fall to market levels?

China’s reserves are shrinking because its exports have been falling, and rates are rising faster in the U.S.

The Chinese, who fear further depreciation, have been yanking yuan out of the mainland hand over fist, and buying up everything from U.S. companies to Manhattan condos. In 2016, China’s foreign direct investment jumped 189% to North America and 90% to Europe, notes Baker McKenzie.

Letting the yuan float freely could eventually boost Chinese exports, stem capital flight, and increase inflation that can help reduce the real value of its debt overhang, notes William Adams, PNC’s senior international economist. But in the short term, it could roil global markets and cause commodity demand and prices to gap lower, hurting inflation expectations and rates. Adams isn’t forecasting a yuan free float in 2017. “But without knowing the People’s Bank of China’s magic number—the minimum level of foreign reserves they’re willing to accept—the possibility cannot be excluded,” he says. This time last year, concerns about China and falling oil prices triggered a 13% U.S. correction. Let’s hope a year has made all the difference.