Daily: Europe moving from smaller bailouts plus austerity to bigger bailouts plus austerity lite

By Edward Harrison On Jun 22, 2012

Daily commentary

Germany, Spain, Italy and France have met to hammer out a unified front ahead of the upcoming European summit and Spanish bailout. This is likely a fleshed out version of the G-20 plan that Barack Obama was privy to. Their answer is the 120 billion euro stimulus package that Francois Hollande has been pushing plus a likely relaxation in targets, what I am calling austerity lite. Meanwhile the ECB has decided to kick the ratings agencies out of the equation by deciding internally what kind of collateral it will accept. The combination of these moves plus the Fed’s operation twist and more QE likely at the Bank of England are hallmarks of a coordinated push to stop the building deceleration in global growth.

Will it work though? I say no. The ECB plan is a surprise and has some of the hallmarks of my ECB Bagehot Rule Policy. It may help to bring interest rates down as the LTRO did in November. But, again, credible liquidity targets rates not quantity. So, when the next problem arises, this policy will run into trouble and they will need to increase purchases. The bailout/austerity lite solution for Spain is what I told you to expect in late April. But, of course, this bailout falls even short of the one I believed was coming in that the Spanish bailout is not a EuroTARP at all. IMF head Christine Lagarde is quoted below as imploring Europe to make it a EuroTARP. But I doubt they will listen.

So my view is that this is more of the same, another extend and pretend type of shock and awe. It’s incrementalism designed to move inexorably toward the kind of fiscal union that Germany want but that commentators like Tim Duy say won’t work. I hate to be negative here but I’m not impressed. Certainly, I am a eurosceptic but I am also practical in that I have been actively looking for upside here. Yesterday’s two-part newsletter was an attempt to offer a solution. The kinds of solutions on offer here won’t work. Let’s hope that the market greets this well even so because that will at least buy time.

Links commentary

Bank tax: Merkel has given up hope on the pan-Euro bank tax and has scaled back her ambitions to a core group of states like Denmark which will support it. The Danish press is reporting that the Danish premier is open to the idea.

Germany ditches push for pan-EU transactions tax | Reuters

Thorning i Rio : »Vi skal overveje en bankskat« – Politiken.dk

Austerity-lite in Greece too: I’m hearing that the Greek government has ruled out big layoffs in the public sector. The Troika want this. And to date, Greece has sacked only a few hundred workers and they have failed to implement the so-called labor reserve which would have meant cutting 30,000 jobs. The prime minister’s office says “The goal is to manage the crisis, open the path to growth and to revise the loan memorandum”. I guarantee you Germany will allow this to go through given the over 20% unemployment in Greece. But this is the crux of the problem for the Troika, Greece’s bloated public sector. How do you cut that when the economy is imploding. It’s a no-win situation

Trust in institutions: There are four links below that talk about an implosion in institutional trust. The gist of those posts in their totality is that in the US a lack of trust in everything from schools to the Supreme Court to government has led many people to want less government. It has also led to political dysfunction. And all appearances are that trust is even lower now than it was a generation ago during Watergate when Nixon resigned. This does not necessarily bode well for US leadership.

Broken Trust Takes Time to Mend – Economic View – NYTimes.com

Trust in Government, Declining With Cuts – NYTimes.com

Confidence in U.S. Public Schools at New Low

Losing Faith in American Institutions – NYTimes.com

Philly Fed: Also note that the weakness in data including jobless claims and the Philly Fed survey are giving the Fed more room to ease despite recent comments to the contrary by Bullard. If we continue to see weak data in the U.S., the Fed will do more.

Philly Fed Reports Weaker Mid-Atlantic Business Conditions – Real Time Economics – WSJ

Bullard says Fed has done what it can do | Reuters

That’s it. Here are the links.

El número de turistas extranjeros en España sube un 2,4% hasta mayo | Economía | EL PAÍS

Why Latvia’s Austerity Model Can’t Be Exported | | New Economic PerspectivesNew Economic Perspectives

Eternal Commodity Bulls Have ‘Thrown in Towel’: Marc Faber – Asia Business News – CNBC – CNBC

Woman Forcibly Removed From Home, In Spite Of Restraining Order Against Citibank – The Consumerist

Simon Johnson: The End of the Euro Is Not About Austerity – NYTimes.com

Staring Down the Bear Market | Crossing Wall Street

Canada Tightens Mortgage-Financing Rules – WSJ.com

Eight of 20 Tepco execs resigning over crisis to parachute sweetly to affiliates, other entities | The Japan Times Online

German High Court Requests Delay in ESM and Fiscal Pact Ratification – SPIEGEL ONLINE