Europe’s Black Cygnets Grow

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By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from /“>MacroBusiness.

And so the black cygnets scuttle from the shadows again.

Over the weekend, Angela Merkel’s Christian Democrats suffered an 8.3% swing in North Rhine-Westphalia as the Social democrats (SDP) and the Greens garnered a majority. Although this is only a state election, called after the previous SDP led minority government was unable to get approval for its budget, North Rhine-Westphalia is the country’s most popular state and seen the bellwether for national government. Of note is the fact that the SDP-Greens coalition governed Germany under Chancellor Gerhard Schröder from 1998 to 2005. Although this is as much about state politics and personalities, especially the SDP leader Hannelore Kraft, the flow-on effects at a national level from such a large turn around are very obvious:

Appearing on stage in Düsseldorf on Sunday night, Röttgen said: “I led the CDU, I was its leading candidate. This is, above all, my own personal defeat — and it really hurts.” Röttgen stepped down from his post as head of the state chapter of the CDU on Sunday. Ultimately, the election had pitted the SPD’s Kraft, who is considered to be a down to earth politician who has no trouble connecting with the people of her state, with Röttgen, a national politician who proved to be too distant from state voters. And although Röttgen hails from the state, he failed to overcome the image that he was a carpetbagger from the capital. His many missteps during the campaign also made it difficult for him to win over the hearts of voters.

The worst came when Röttgen said he wanted to make the vote a state referendum in support of Chancellor Merkel’s policies for saving the euro. Merkel’s positions have been popular with German voters, but the chancellor wanted no part of Röttgen’s pending election defeat. Angry, CDU politicians at the national level distanced themselves from Röttgen, saying any loss in North Rhine-Westphalia would be his alone. It nevertheless represents a setback for Merkel and the CDU because the vote in the state, with its 13.2 million people, often influences the outcome of federal elections. And although there had been tensions in the run-up to the election, Röttgen is a political protégé of the chancellor and his defeat is ultimately hers as well. The loss threatens to further erode the chancellor’s clout — both at the national level and within her own party.

It is yet to be seen if the SDP can build on this win and engineer a campaign at a national level, many are doubtful, but this election loss for CDU isn’t the first, with Baden-Württemberg in March 2011 and Merkel’s home region of Mecklenburg-Western Pomerania in September. This continuing poor result may have some moderating effect on Angela Merkel as she meets Francios Hollande for the first time in his capacity as the President of France on Tuesday, and now that the politicking is over on both sides it will be very interesting to see what comes out of this first meeting.

The Franco-German relationship, however, is obviously not the major topic of concern at this point. That once again goes to Greece who over the last 24 hours have seriously ramped up the “risk off”.

As you may know, over the weekend PASOK’s leader, Evangelos Venizelos, failed in his party’s attempt to build a working coalition to govern Greece. Given his party was the last of three to be given such a mandate by the Greek President, Karolos Papoulias, the task of attempting to form a government fell back to the president. On Sunday the President held one-on-one talks with party leaders to no avail, and then on Monday morning the leaders of New Democracy, Syriza, PASOK and the Democratic Left were invited to the president’s office for final talks.

The outcome of the meeting became known before it even occurred as Syriza leader, Alexis Tsipras, refused to enter into new talks:

… Left Coalition (Syriza) bloc, which finished second in May 6 elections with 16.8 per cent, announced late on Sunday that it would refuse to join a coalition government.

“Syriza refuses to be a left-wing alibi for a government that will continue the policies the people rejected on May 6,” NET state television quoted Syriza leader Alexis Tsipras as saying.

Tsipras earlier said he would not join or support a pro-bailout coalition government, saying he could not agree to what he termed a mistake.

And once Syriza was out, then so was the Democratic Left:

The leader of Greece’s moderate Democratic Left party reaffirmed on Monday that he would not take part in a coalition government without the more radical leftist SYRIZA group, hours ahead of a final round of talks.

“A government that does not ensure the participation of the second party will not have the necessary popular and parliamentary support,” Fotis Kouvelis told Antenna TV, saying he wanted a broad-based “ecumenical” government.

It now appears, given the failure to build a working coalition, that the President is pushing to reform a technocratic cabinet, but it is unknown at this stage whether Lucas Papademos still wants the job, whether the political leaders would accept such a proposal or whether the citizens of Greece would be accepting of such an outcome. Negotiations are continuing but it looks almost inevitable that no agreement between the parties is going to be found.

The other black cygnet, Spain, also squawked overnight, with Spanish banks again adding to the dour news. Over the weekend, last week’s rumours of a new government plan to sort out the banking system became a reality. In the last 24 hours Moody’s has provided some opinion on the matter that may sound a little familiar:

Spanish banks will remain vulnerable to rising loan delinquencies even after they set aside €30 billion ($38.75 billion) in newly announced real-estate loss provisions, Moody’s Investors Service warned Monday, highlighting mounting concerns about the country’s ailing financial sector.

The Spanish government told banks Friday they must bolster their provisions to protect themselves against potential losses from loans to real-estate developers not currently considered to be at risk of default, a move that came just days after authorities bailed out troubled lender SA.

Moody’s said the added provisions will improve the capacity of banks to absorb losses but they remain vulnerable to the current recession and continuing real-estate crisis.

As a reminder, Spanish property prices have fallen nearly 30% from peak and accelerated that decline in April.

The Greek stock market fell another 4.5% overnight and is now down 56% for the year, while Spanish 10 year bonds jumped to a yield of of over 6.22%. Italian 10 years also leapt to 5.69%.

In other news, Eurozone industrial production “unexpectedly” fell in March, the Irish construction PMI also took a good whipping in April and , in case you missed it, the European Commission thinks Spain will miss its deficit targets this year and next and Portugal, that European model of successful austerity, is going to need some more because of a “more pronounced fall in private consumption and the substantial worsening of the labour market situation”. Finally, Moody’s downgraded 26 Italian banks.

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19 comments

  1. Calgacus

    Really, what “black swans” “black cygnets”? Supposed to be something surprising, rare, unexpected, unusual.

    The Euro, the ECB, Maastricht, the treaties are a black swan breeding program. The problems aren’t weird, they’re inevitable.

    As Wynne Godley said 20 years ago, this crazy system has nothing in it, nothing that will prevent economic problems to the extent of mass starvation. Mass starvation. The real black swan is that it has taken this long & the system is still allowed to cause immense destruction. Not that the long stagnation and subsequent crises occurred -that’s a white swan.

    1. tom allen

      Organisms adapt to their environment. If the environment is corrupt, the individuals become corrupt; if the environment is well-regulated, the individuals behave well. It’s simple evolutionary adaptation.

    2. Up the Ante

      “As Wynne Godley said 20 years ago, this crazy system has nothing in it, ..”

      And ‘Booshie’ and his Iraqi war green light is when their banks took off ?

      Ta-da

  2. Paul Tioxon

    And once Syriza was out, then so was the Democratic Left:

    The leader of Greece’s moderate Democratic Left party reaffirmed on Monday that he would not take part in a coalition government without the more radical leftist SYRIZA group, hours ahead of a final round of talks.

    “A government that does not ensure the participation of the second party will not have the necessary popular and parliamentary support,” Fotis Kouvelis told Antenna TV, saying he wanted a broad-based “ecumenical” government.

    Notice the effect of a truly disciplined cadre acting in concert. It’s all and everyone or none of us. It takes a lot of time to develop that level of trust in a relationship to act together, especially under the pressure of the situation. There may be little practical outcome, but the discipline of social cohesion is no easy product. It needs to be maintained for the time when there will be a rebuilding, when the one crisis is past and the time for operating the mechanism of state is allowed for. At that time, politicians who have been through the crucible will can move with boldness as the voice of people incarnate, their task the easier due lack of uncertainty. I saw a man set himself on fire after he doused himself with at least a gallon of gasoline, in Greece, during a protest!! This is no small act of protest. There may not be revolutionary change, yet, but there is radical resistance.

    http://www.youtube.com/watch?v=XMvksR3Q8jQ

    1. rotter

      I agree. Howver,that whole self immolation thing im not too keen on. The Buddhist Monks who set themslves on fire in Saigon to protest the American war were, to me, a bit more understandable – They were monks, after all, who have devoted their lives to being martyrs, and within the context of the Vietnam war, when thousands of Men Women and Children were being burned alive every day. But if the anti austerity movement should be dumpong gas on anyone, its not themselves. Maybe take a lesson from the Hatians.

      1. rotter

        Nothing is going to “work for the Hatians”.A black Carribean nation does not have any “right” to self rule, and if you want to argue thats not true go for it. Im just saying enough monks and pacifists have burned already. If theres going to be an immolation that is……

  3. b.

    The SPD (and even the Greens) won’t provide any turnaround of significance in Germany. As one observer remarked decades ago, it is difficult to raise or shake your fist if you have all your fingers solidly lodged in the pie.

    Under Schmidt, Germany had a competent value-conservative – man had his limitations, such as supporting the medium range Pershing deployment, but he was a giant among dwarfs. Setting aside the Kohl-Merkel cabal that persists to this day, Schroeder was the epitome of corruption. It is a footnote of history that Germany, a UN Security Council member due to rotation at the relevant time, could have single-handedly forced a full UN assembly debate and vote of the US aggressive war in Iraq that Schroeder claimed to oppose to gain leverage in domestic elections (the relevant mechanism under UN Resolution 377 having been initiated by the Eisenhower administration in an attempt to restrain the UK and France in the Mid-Eeast, I believe). Schroeder was a fraud of Blairean proportions, just following a different script.

    In a more general sense, the SPD has steadfastily meandered itself towards less and less relevance due to its determination to stay clear of anything that could possibly be considered socialist. That become a problem immediately after the wall came down, as the SPD has failed to provide a alternative to voters inclined to move to the Brandt-and-beyond part of the political spectrum, who hence had to choose from SED derivatives or abstain. The Greens have steadily become another ‘stablishment mouthpiece – alongside Schroeder, Fischer has to be named as one that conducted business-as-usual in the “alliance” with the US during the ramp-up to the Iraq war. The unseemly haste in which the Grundgesetz restrictions were set aside to allow deployment of German troops beyond NATO proper, and the compromised attempts to let the US have their black-sites and torture while keeping their NATO, too, is another hallmark of 21st Century German drift and shift.

    If you are waiting for a leading SPD politician to forcefully make the case for an honest *political* union, or a Euro break-up, or for a national receivership of German (or any) banks, you might have to wait a few more decades. A lot of German state politics – and a good chunk of personal career perspectives – is tied to state-level banking institutions that led the way in gobbling up “securitites” in transations beyond state, German, European, and continental borders.

    Yes, Merkel lost a few votes. So did Obama. Their prospective replacements, if any, are all part of the same consensus.

    1. ginnie nyc

      Sadly, true. SPD-chief Schroeder was known as “Genosse der Bosse”, the Comrade of the Bosses. I don’t expect the SPD to have significantly different economic (or foreign) policies from the CD alliance.

      1. Jim

        Merkel, for all her faults, is more loyal to German than Schroder. Based on Schroder’s comments over the past couple of years, he’s willing to sacrifice German well-being for the sake of the Eurozone. In fact, were he in power, I wouldn’t be shocked if Schroder called for permanent fiscal transfers from Germany to the South. Does Schroder even still live in Germany?

    2. bmeisen

      Hard to figure out what you expect from SPD/Green – minimum income of 15k for everyone? Fact is that if they win the next election they’ll do so with not much over 50%. And Schroeder had a majority in the Bundesrat for all of 6 months. Nevertheless they did reform citizenship law, started the transition away from nuclear – Trittin’s victory over Clement – and tried to reform Elternzeit. And unlike Blair they loudly and publicly challenged Bush in Iraq. Your critique of the UN vote is petty. Schroeder survived 2 Vertrauensfragen! The guy was a contender! Ohne REalpolitik geht’s nicht im Kanzleramt.

  4. Hugh

    The US, Europe, and China have all been engaged in mammoth bouts of can kicking. While all eyes are on Europe, the US and Chinese economies are both turning sour. Japan appears to be stuck in its perennial doldrums. I don’t follow the BRIC that closely by it would be interesting to know how they are doing. In any case, it looks like we are approaching another breaking point. Will the thieves and looters who are running things be able to cobble together another stopgap or is this the time they drive it all over the cliff?

  5. F. Beard

    Keynes noted that workers would resist real wage cuts if they were delivered via cuts in money wages but would tolerate them if they were induced by general inflation. The rationale was that the former would disturb relativities while the latter impacted on the wage structure more or less uniformly. But there is another reason why preserving nominal wages growth is important.

    Most of our contractual commitments are denominated in nominal units ($ or whatever currency is applicable). So when real wages are being cut by rising inflation (in this case by a depreciating exchange rate) but nominal wages are preserved, workers can then make adjustments to the composition of their spending without, in the first instance, undermining their capacity to meet their weekly contractual liabilities (for example, their mortgage payments).

    Attacking nominal wage levels, more readily undermines the capacity of workers to meet these nominal contractual obligations and opens the possibility for further instability (credit collapse etc). from http://bilbo.economicoutlook.net/blog/?p=19429#more-19429 [emphasis added]

    The Austrians often mock Keynes’ inflation argument as if it is a meaningless con on the workers and they have a point (to Keynes’ shame). But Bill Mitchell’s point is very solid; one cannot expect workers to take a nominal cut in their wages UNLESS their nominal debts are cut too.

  6. Stefan

    If the chancelor indeed governs according to public mood, she won’t look after regional election results in order to inform herself how to stay popular. Recent German state elections clearly were purely regional and results were controlled by state issues many voters were interested in. In line with the local nature of these elections, Merkel’s popularity has remained high even though her party lost local elections. A few years ago it was all different for Schröder: His party lost boring state level elections with no local matters of importance. His popularity was at record lows at the same time. Dont get your hope up that Merkel feels forced to change course because of fading popular support within Germany. According to opinion polls, 60% of German voters reject debt driven growth and with her party weak on local issues Merkel might as well decide that she needs to spend less in order to boost popularity.

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