Germany PIIGs

 

The lastest developments in the Euro-zone. First a look at some of the major papers:

Among others the German Newspaper Frankfurter Allgemeine Zeitung has:

“We will talk about whether “systematically important” banks should come under a specific European Bank Inspection to avoid giving national agendas too large a role. That is a mid-term goal,” Said Merkel Monday evening before a meeting with EU-Commission President José Manuel Barroso in Berlin.

Comment:

What isn’t clear is if the European Bank Inspection will extend beyond the Euro-zone. This would indeed be a cat in the British pigeon coop! The need is more than evident, as just last week a hole in the Spanish Bankia of 23 billion EUR couldn’t be hidden any longer – the latest in a series of embarrassing revelations.

But more than one thing is going on:

Rheinischer Post has:

 

Merkel had during the weekend explained that a Tobin-tax covering all the European Union was – for the moment – not possible. But she saw it as a definite possibility that: “… we could get a result with similar minded countries.”

The opposition leader Frank-Walter Steinmeier explained:”The Government is still not getting how their position is:”They need a 2/3 majority and will have to negotiate.” Lecturing and headlines were of no use. ”We expect clarity from the coalition: The financial sector must contribute [pay up] to the management of the financial crisis!”

Comment:

The Financial Pact needs a 2/3 majority in both parliament and Bundesrat (“senate”) – and must get the opposition in on it. But that will not be for free:

Handelsblatt has:

The Government will bring the EU in motion with a growth strategy – in order to move the opposition.

Comment:

Hardly: The growth strategy is the sales talk to the other EU members. To Germany it is a sensible investment in infrastructure – if I’m not wrong.

Further:

The FDP [coalition partner] is not rejecting a Tobin tax totally; but as that would be a type of VAT it will end at the consumer – instead of the Financial Sector.

Comment:

What makes this urgent is that there is a time factor involved: The opposition has given the government 3 days and it has to be brought into place before the EU meeting at the end of the month.

Where will it end?

Well the investment plan WILL go ahead and stimulate – especially the German economy – but this linking is probably not going to work out that entirely well. The other linkage is the control over the financial sector where the question is whether the best way to do it is through insight and control with the banks OR through taxes, fines, public flogging of bank manager or what have you.

The best way will be: All of it!

1)      What society really wants is that banks run without the need to rescue them when they have made a dogs dinner of everything – because as we see now: That is expensive. So there will be a stricter control. Banking is not self regulatory like production and sales of soap.

2)      There will also be some taxing of f.i. trading in shares. How effective it will be remains to be seen – though I’m not terribly hopeful.

3)      A to the payment of the mess: It is terribly difficult to levy taxes on people that to all intends and purposes are bankrupt. You can tax profits, but there are no profits as there is a huge backlog of losses not taken. You can tax on the payroll so banks are only staffed as necessary. A transaction tax will not bring any sizeable revenue for the extent to which the tax is effective it will limit the number of transactions.

4)      The real problem behind the high volume of bank transactions is a fundamental lack of understanding in banks about what they are doing: You can insure and diversify the unsystematic risk away; but not the systematic: I.e. you can never insure against f.i. a country going bankrupt. An insurance against credit default on f.i. Spain is worthless. Does Spain not fold the insurance is a waste of money. If Spain indeed defaults the damage is so great that the insurer goes bankrupt.