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A Central Banker Utters The Truth
Wolf Richter www.testosteronepit.com
On July 1, the Republic of Cyprus, a tiny country on a divided Mediterranean island, will rotate into the Presidency of the Council of the European Union—one of those bitter European ironies because Cyprus will likely have to be bailed out, according to Central Bank governor Panicos Demetriades. It adopted the euro in 2008 and is already in a heap of trouble. Last year’s loan from Russia has kept it afloat, but now it’s bailout and haircut time. For the very peculiar morass Cyprus is mired in, read.... Another Eurozone Country Bites the Dust.
And reality is now even staining the Teflon economy of Germany with a daily litany of suddenly awful data points:
New vehicle registrations, which had been holding up well, fell in May by 4.8% compared to prior year. Commercial vehicles spiraled down by 13%, and heavy trucks crashed by 32%.
The KfW business climate index for small and medium size companies dropped by 5.7 points, to 12.9, three times the normal monthly variation; for large firms, it dropped 5.8 points, to 12.3. In its explanatory statement, the KfW banking group, a government-owned development bank, used the terms “recession fear” and “panic attack.” A “clear warning that has to be taken very seriously” where “the risk of a downward spiral ... rose enormously.”
April industrial orders dropped 1.9%, the worst decline in six months—with export orders down 2.6%. The wobbly economies in Europe and elsewhere are finally catching up with the export powerhouse.
And Spain is begging desperately for a massive bailout of its banks, after claiming for years that they wouldn’t need one. But it doesn’t have the money, and “the door of the markets isn’t open to Spain,” explained Budget Minister Cristobal Montoro. So taxpayers in other countries should fork over the money, via the EFSF bailout fund, and pay it directly to the banks. Which is against the rules. Germany, insisting that rules be adhered to, opposes that scheme whose purpose it is to bail out Spain via its banks to avoid otherwise obligatory structural reforms. With these issues mucking up the predictions of growth in the US, CNBC’s pundit called on the US to bail out Europe.
What a relief then to hear a voice of reason. Even if it’s from a central banker, Jörg Asmussen, Member of the Executive Board of the ECB and a German politician in the opposition SPD. In articulating hard truths and an uplifting message, he followed in the footsteps of Jens Weidmann, President of the German Bundesbank and Member of the ECB Council who’d given an awesome interview in the lion’s den. Read.... Bundesbank President Lashes Out.
Asmussen was speaking in Riga about Latvia’s problems, its astonishing rise from the ashes, and its lessons for the Eurozone. In 2008, Latvia’s debt-fueled economy collapsed with a cumulative GDP decline of 24%, the worst in the world. Its currency peg to the euro came under sharp criticism. Pundits pressured it to devalue. Paul Krugman called it “the new Argentina.” But instead of going for the “quick fix,” Asmussen said, Latvia implemented tough “fiscal consolidation and structural reforms.” In 2009 alone, it cut its budget by 9%—far beyond any EU country. Harshest austerity, instead of spending and borrowing its way out of trouble. In the middle of a gigantic crisis!
Against everything Krugman holds so dear, the economy stabilized in 2010, and in 2011, GDP jumped 5.5%, the fastest in the EU. Cut off from the financial markets, Latvia had received emergency loans from the IMF and the EU, but its stunning fiscal and economic performance allowed it to return to the financial markets far faster than projected. Its competitiveness improved. And its currency peg to the euro remained intact.
Despite unmitigated austerity, the Prime Minister was reelected twice, while all those in the Eurozone who tried to reform anything at all were kicked out of office. Latvia had accomplished in the shortest time an “internal devaluation” rather than choosing an “external devaluation” via its currency.
“Speed is of the essence,” Asmussen said. The government attacked the deteriorating public finances, got the people to take ownership of the reforms, and “frontloaded” the toughest measures, rather than dragging things out and implementing half-measures. And it got them passed before “adjustment fatigue” wore people down.
“The bottom line is this: when adjustment is inevitable, it is better to take the medicine right away than to let the fever rise for months,” Asmussen said. Latvia demonstrated that an “expansionary contraction” isn’t an oxymoron. “Even if fiscal consolidation weighs on the growth prospects in the short term, it has sizeable positive effects in the medium to long term.”
Austerity alone wouldn’t have been enough. The government also implemented “growth-enhancing structural reforms” to foster a policy environment favorable to “growth and wealth creation.” A bit tricky in face of vested interests. But critical mass overpowered them. “Education, health care, central administration: hardly any public sector category was spared by the reforms,” he said. People weren’t left to twist in the wind. Social safety measures were put in place, which helped gain support for the measures. So what made all this possible? A “broad consensus in society,” he said, “the key difference” between Latvia and Greece.
Latvia is scheduled to adopt the euro on January 1, 2014, despite the mayhem in the Eurozone. For the former member of the USSR, the euro has a “geostrategic dimension, namely completing their firm anchoring in a Union based on freedom, democracy and human rights.”
Meanwhile, Switzerland, a speck of land surrounded by turmoil, is bracing itself, according to the President of the Swiss National Bank and euro-skeptic, for the collapse of the euro. In the process, it’s creating a housing bubble with potentially horrendous consequences. Read.... Bracing for a Euro Crash: The Swiss Caught in a Vice.
Pundits have suggested that teetering Eurozone countries should follow Argentina’s lead of default, devaluation, and growth. Alas, Argentina’s economy is beset with capital controls, staggering but underreported inflation, trade restrictions..., and the daily clanging of pots and pans, and much more disruptive behavior, in protest against everything in the book. Awesome article by Bianca Fernet on the ground in Buenos Aires.... Everything but the Kitchen Sink.
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Latvia is also cutting down its forests in record speed to create Jobs.
Great policies!!!
Asmussen belongs to prison, this thick fuck. Asmussen was chearing for Banking deregulation for 10 years. He was promoting deregulation as poodle of former treasury Per Steinbrück.
Without Asmussen´s efforts Germany would habe some 100 billion Euros less debt. He should be investigated, trialed and than taking the verdict of the judge. It is a shame and a disgrace that this guy has a position within the ECB. At the other hand this fact shows very clear what the ECB in its core is. A bunch of Neo-Liberal worthless technocrats. 2 weeks ago they made out of my home City Frankfurt an absurd Police state. The whole City blocked for days, Metro Stations locked down, Highway exits closed. Armed Police forces all over the place. Heöicopters and surveillance, Secret Police. For me this guy is a fashistic mobster, vain, arrogant and a Coward.
Wow, another Brainstein, forgetting and point-diminishing aspect -- such as level of exports kinda plays a role or that it is not a question of ppl or even leadership, you can't fool ppl into internal devaluation if they haven't faced the tru cold of Russia or someting similar (is there any?) -- just to look cool, smart, etc.
Greek poiliticians fighting... Why didn't he just ask her to go and make him a cup of tea...http://www.youtube.com/watch?v=IwrVxRfxyDE
Estonia did the same thing.
http://www.globalpost.com/dispatch/news/regions/europe/120604/estonia-economy-technology-skype-euro-zone-debt-crisis
Estonia has the same population as San Diego, and its recovery is still at -10% GDP to peak with 12% official unempolyment and the lowest wages in the Eurozone. Try again.
Recovery does not mean that the height of bubble should be attained anytime soon. All economies need true organic growth instead of speculative bubbles.
Estonia had 10%+ inflation for 15-17 years before the bubble burst.
This is another ideological propaganda piece that takes outmost care to conceal what most reasonable people would call important facts:
1) 25% or Latvia's workers emigrated, which obviously also did wonders for its unemployment numbers.
2) Latvia's GDP could only go up after a world record of -24%, and it still needs to grow about 18% to reach its former peak. It is certainly too early to cry 'success!'. They might not reach this peak in decades for all we know. Even a dead cat bounces for a while.
3) The neoliberal Taliban absolutely love cuts, any cuts, and Latvia also broke the record in education cuts: 50%, another world record, which obviously will do wonders for its future.
4) The reason the politicians who enforced those savage cuts didn’t lose elections was because Latvians voted along ethnic lines and had no choice (the other alternative were Russia-friendly parties).
5) Inequality has shot up to unheard-of levels, with the complete destruction of the middle class and the nation divided to a parasitic crony elite (who are best friends with guys like Jörg Asmussen and his Frankfurt bankers), while everyone else is poor.
Because of all these and other reasons , not even the usual suspects will dare touch Latvia anymore as a supposed poster child of 'success' of savage neoliberal policies, Latin America-style. And make no mistake about it, while many here admire Germany, and rightly so, the truth is that Jörg Asmussen and the Bundesbank are no friends of the common people or the German hardworking man, they are just like all other central bankers, working for the interests of the German plutocracy, in this case 'helping' Latvia by buying Latvia's assets for crumbs. Sure, you might also call that 'investment'. Others might call it ‘looting’.
This Testosterone Pit guy is certainly not up to ZH standards. I thought mindless ideological propaganda had no place here. Maybe I was wrong.
Wait, what? Zero Hedge has standards?
Surely you jest, kind Sir.
Oh, I see... You must be new around here.
Yes, evrything there is geared to the comfort of the parasitic elites that inexpensively bought the goomint.
Couldn't have said it better myself. It was a total whitewash of what is really happening there.
Yes, so let's look at what such a great 'success' story would mean for the USA after a big crisis:
1) 38 million American workers emigrating to Canada, Europe, wherever. Unemployment numbers down, success!
2) GDP going -24%, then going 5% up. Mission accomplished.
3) 50% cuts in education, guaranteeing a great future, success!
4) Foreign 'investors' showing up to buy every imaginable true asset at fire-sale prices, hurrah!
5) Foreign central bankers praising our policies as a great model after such compassionate ‘investing’ by their friendly bankers is completed, now they really like us, success!
6) No more middle class, nation divided into crony elite sharing the spoils with above 'investors', rest on food stamps, success!
You can't make this stuff up.
The GDP rises are exports.....its exporting its wealth..... the internal demand is dead DED dead.
Its the purest colony in the EU family.
Its a good boy ,good boy.
Iceland is a 'success' (add vulture capitalists and illiquid currency).
Argentina is a 'success' (it exports oil and has resource curse, has defaulted, has no access to international credit markets and is politically unstable).
Latvia is a 'success' (it has turned itself into a rentier safety zone with heavy labor taxation and consequently few workers).
Iraq is a 'success' (it has successfully rid itself of pesky Americans w/ their heavy artillery but only millions of pieces of unexploded ordnance left behind ...).
Afghanistan is a 'success' (... a trillion dollars in and what do we have to show for it? 4,000 tons of raw opium/year, baby!)
Croatia is a 'success' (the Ustashe is a model for progressive political organizations across Europe).
China is a 'success' (the entire country/water/agriculture is poisoned by heavy industry, government is completely corrupted, the rich are fleeing the country with whatever portable forms of wealth they can steal ...).
Japan is a 'success' (only four reactors have blown up/melted down instead of 54 ... but it's early yet).
All kinds of countries are on track to be 'successes': only a few reactors have melted, only some of the topsoil is ruined, only some government officials are thieves, only some businesses are thieves, only some water is polluted, some people starving or dying of disease, only some killed in wars.
Gotta love that success!
W10321303 :
Those who emigated to find jobs AT LEAST DIDN'T HANG AROUND WAITING FOR SOMEONE TO GIVE THEM HANDOUTS!! If only that would happen here...
Let's all go to mexico and get on the dole.
Wait a minute...
Nevermind.
LATVIA....HAH HAH HAH! you might as well be talking about Montana!
No mention of all the Latvians under 30 who emigrated looking for work...self-serving neo-liberal nonsense.
you caont have a world of debt slaves un less you force expensive government programs on them and pile the debt on the masses. The ECB and FED want the bailouts, the want the near debt defaults, "sure you can have more of this paper I just printed. Thanks for letting us own your ass for nothing!"
Fantastic article Wolf! I always read your stuff, we need more good hard-digging work on Europe.
We could easily cut our budget by 9% if we take it out of defense spending, some of the most wasteful spending on the planet. But does anyone realize what a 9% spending cut would do to the US and the dollar? Is there a status worse than third world country status?
First, you can cut defense spending without even laying anyone off. Just burn less fuel. stop paying $5000 per gallon or whatever for fuel in Afghanistan. stop using missles that cost millions of dollars to try to kill one or two people that are between 16 and 35, male, and in the general vacinity of a combat zone.
Second, why would spending less on military destroy the country, especially if done by reducing fuel and weapons costs, reducing overseas bases, etc, rather than by laying everyone off?
I suspect bringing the budget under control would result in America regaining AAA rating, and in turn I would anticipate the USD would gain in value. Unfortunately, that would make Chinese trinkets even less expensive than they already are.
Cutting the budget 9% probably takes it to ...2008 levels. Harldy third world.
If we were spending at 2003 levels, we would have a surplus at today's revenue levels.
Yes there is...
Detroit.
http://www.youtube.com/watch?v=bVDDYQlmq0w
its all greece's and turkey's fault
'For the former member of the USSR, the euro has a “geostrategic dimension, namely completing their firm anchoring in a Union based on freedom, democracy and human rights.”'
Oh? And which union would that be then? Please point us in the right direction, so we can join it too. 'Cause the one we're already in sucks.
Didn't Russia just implement $9,000 fines for "illegal" protesting?
PS, the average Russian makes around $18k a year...
So while the US is erroding and corrupt, we're not quite to the level of USSR issues.
Come on guy, it sucks way less than being a minority republic in Putin's Russia, let alone the former USSR. Perspective generally helps.
Latvia had received emergency loans from the IMF and the EU, but its stunning fiscal and economic performance allowed it to return to the financial markets far faster than projected
just how will the imf bail out the u.s. when proposed austerity measures destroy the u.s. populace?
“Education, health care, central administration: hardly any public sector category was spared by the reforms,” he said. People weren’t left to twist in the wind. Social safety measures were put in place, which helped gain support for the measures...
ha, our whole debt laden system exists because of social supports that latvians could never dream of. the u.s. social support system, where tens of millions of people receive free medicine, free shelter and free food is the very heart of our problem. how could the u.s. keep social safety measures in place and make massive cuts at the same time?
quite simply, latvia's success is not something that can be replicated in the united states. the u.s. has deep rooted structural issues that have been building for decades. a few years of austerity will certainly not fix the problem.......
Yay! Finally something positive about Latvia (we latvians have been the butt of jokes too much). No Kito, Latvia isn't like America. You have a much more culturally homogenous population, avg person is highly literate, speaks 2-3 (or more) languages. But we don't have multiple wars (even tho we have a couple guys in NATO in Afghanistan), so never have to worry about the expense. I can say we don't have love for the old Soviet empire, but for a lot of people, that wasn't that a bad deal. But don't count me as a russian-hater. I consider anyone from eastern europe to be more a brother to me than not (except politicians and oligarchs). It's a balancing act--how can we not end up a vassal of either the west or east? As for the austerity, these people have seen some terrible suffering, so this financial crisis was bad, but nothing that would actually kill you. Of course, we had a huge % of the population travel to the west to make money (and send some back home). This would be impossible for America--where would the equivalent 5-7 million carpenters/workers/etc go?
If you are really a Latvian, hats off. Examples such as yours and of your country will not be followed - Europeans are too comfortable, too fixed on the good life to even think about small cutbacks, dont mention words like austerity, sacrifice, saving, postponed consumption.
That last phrase would give most economists combined heart seizures and severe diarrhea.
Make most of what you have gained, it is important not to lose it or give it all away, like the Germans.
the taxes on labor are enormous compared to the tax on property. Large property owners that bought up gobs when the outflow of the populace are directly subsidised by labor and small business, yet the benefits accrue to the property owners.
How about Henry George?
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I WENT FARTHER DOWN TO Steve in Virginia that has this:
Latvia is a 'success' (it has turned itself into a rentier safety zone with heavy labor taxation and consequently few workers).
Kito: also deep-rooted hyper-expectation issues coupled with low level of ability to add 1+1.
Latvians are responsible and intelligent. They are more like Swedes and Finns than Russians. The USA is filled with feral Hope & Change scum.
The reality is that Greece needs to be a low-tax nation, mostly for the reason that Greeks will not engage, wholesale, in the kind of tax system required to fund the size of the state they have at present until, at least, two entire generations in both the public and the private sphere feel the system works for them. The Greeks need a low tax/low public spend economy.
I would say the same for Italy and, probably, Spain.
A government has yet to hold power that believs the answer to any `crisis` is not more government, and hence more taxation and even more borrowing.
So while I agree with you, and would go as far as to say, less government and less tax would benefit all mankind, it is not a realistic expectation.
It sounds, from the article, that Latvia did it. Canada did it from 1995 thru ~2002 as well, mainly by cutting unemployment benefits, and without raising taxes at all.
Notice that Canada didn't cut universal health care. If you're unemployed you don't lose your home if you get sick.
Matt: We don't have a moral fortitude or the desire. People moan but don't think they have anything to do with having created the problem.
Same with Estonia.
"Central Bank governor Panicos Demetriades"
LOL.
"Panicos" is Greek, or maybe Mexican, for "Panic". Panicos is a banker. It's like having an American President named "Hussein". It's funny!
Panicos DementedTirades
Truth In Advertising.
PanicosDementedTirades.com
So Latvia fixed it. First the bitter medicine has to be swallowed and then a few hard years do follow. But thats it. It sounds easy but it is not.
The Latvian population had very had years to survive, but there was no other choice. Greece could do the same, but its ruling class does not like to loose its privileges. For the population the coming years are anyhow becoming very hard.
So the only questions is: Do these hard years ahead change something to the better in Greece as comparable to Latvia ? Or are these hard years wasted and everything stays as it ever was and there is no hope because the rulers and the population do not pull at the same side of the rope ?
What about all those weepy union bitches in Wisconsin? "Democracy died tonight - boo hoo" Time for those weeepy WI union vermin to move to Grease.
Hey Tylers - more Snorg T-shirt and Road Kill T Shirt banner ads. Tell them to make the girls "breasts-es" even bigger. No more O 2012 or Wookie 2012 banner ad sh*t. Thanks.
Latvia has unique circumstances that made it different in its willingness and ability to endure 'austerity', as Ambrose Evans-Pritchard has pointed out,
For one thing, a whole bunch of Latvians got up and emigrated out, the equivalent of millions leaving some other countries. That sure helps 'unemployment' figures.
Another thing is that many Latvians are crazy paranoid about the Russians, even more than the Greeks fear the Turks, and were willing to endure almost anything to stay in what they see as the non-Russian loop with Nato etc.
And a lot of unusual things can take place in a small country, that simply don't work, when scaled into a large, diverse, multi-million person republic.
Latvia (and similarly sized 'unemcumbered' countries) work more on the model of a family living beyond its means than a large, currency-issuing, multi-culturally diverse, internationally leveraged/engaged state. Latvia could therefore more easily enact the 'family' solution for extravagance / debt - just stay in & don't go out every day spending your 'salary' & soon be able to weather the worst.
The 'family austerity' model practised by Latvia, ironically, can only work when the rest of 'town' (or the World, in Latvia's case) was still buying / getting into debt as usual, i.e. it has first-cutter advantage.
Reimbursed workers wages are an important currency import/current account boost. Most emigrants return to the country of origin or birth, having sent enough back to build their furture homes and businesses. Emigration is one of those short term losses for long term gains.
Same could be said for a small country like Iceland. It's a different story with a country the size of Italy.