German business confidence falls in April for the second consecutive month, according to a closely-watched Ifo survey.
Continued here: German business confidence sinks
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German business confidence falls in April for the second consecutive month, according to a closely-watched Ifo survey.
Continued here: German business confidence sinks
German airline Lufthansa cancels the majority of its flights scheduled for Monday due to a strike.
Go here to read the rest: Lufthansa flights hit by strike
German carmaker Opel announces the planned closure of one of its factories by the end of 2014 after a deal with unions falls through.
See original here: Carmaker Opel to close German plant
The Dutch maker of Douwe Egberts coffee, DE Master Blenders, agrees a 7.5bn-euro takeover offer from a German private consortium.
Read more here: Bid for Douwe Egberts coffee company
Luxembourg would consider greater transparency of its banking sector to help curb tax evasion, the finance minister tells a German newspaper.
Read more here: Luxembourg ‘considers’ open banking
There is a close similarity between football and the economy of Europe. Should German-style regulations control both?
The Champions League quarter final between Borussia Dortmund and Malaga is a metaphor for the economic and political fault lines of Europe. Dortmund represents solid German values, a profitable club from the tightly regulated Bundesliga. Malaga, by contrast, has been in dispute with Uefa for some time and had until midnight on 31 March to prove to Uefa that they have paid up all overdue debts or they will be excluded from Uefa competition for the next four years.
It’s true that a few years ago Dortmund had financial troubles, but they were forced to sell players and accept a loan from Bayern Munich to balance the books. Equivalent regulation and control is unknown in Spain. Last week a report suggested that Spanish clubs as a whole may come under investigation by the European commission for receiving illegal state aid, and by most accounts the majority of Spanish clubs are not commercially viable. Even Spanish MEPs have called for football clubs to live within their means.
Just as the Spanish economy is mired in recession because of a catastrophic backlog of bad debts and the German economic juggernaut continues to prosper, so German football seems ready to carry all before it while southern Europe’s traditional strength seeps away. Indeed, there is a very close similarity between football and the wider economy of Europe, in terms of the causes of crisis, the solutions, and ultimately the winners and losers.
First, the problem. Contrary to appearance, there is little difference between a football manager and a bank manager. Both are gamblers who use other people’s money to bet on the next big thing. Both work hard to present an aura of invulnerability and inevitability, when in reality both are exposed to the fickle laws of chance.
The principle of banking is to borrow short and lend long, giving rise to two sorts of risk – liquidity risk (depositors want their money back) and solvency risk (the long-term investment you lent to went belly up). Usually it is insolvency that leads to a liquidity crisis and general failure.
The principle of football is to buy players today in the expectation of future success and income, which also gives rise to liquidity risk (the future revenues are slow to arrive) and insolvency risk (the future revenues never arrive).
Given that we cannot live without banking or football, both sorts of manager are prone to moral hazard – taking excessive risk today in the knowledge that if things don’t work out tomorrow then the organisation is too big to fail. Banks and football clubs almost never disappear, but they often have to be propped up when they fail.
Historically the propping up has been carried out by local and national governments. In the case of banks, it has been the national central bank that has provided liquidity as the lender of last resort, and the central government that has bailed out losses by using the largesse of the taxpayers. In the case of football, typically local governments have provided subsidies and the national tax authorities have written off overdue payments to keep the clubs afloat.
Now Europe has a new regime, the eurozone for banking and Uefa financial fair play for football. For those nations signed up to the euro, the European Central Bank provides liquidity for the banks and if the bad debts are too large for the national government to cover – as has been the case in recent years for Ireland, Portugal, Greece, Spain and now Cyprus – then bailout has to come from the combined eurozone, whose decision-making is currently dominated by Angela Merkel and the German government.
In the past many governments were prepared to write off bad debts by printing more money and inflating the problem away, reducing the value of their currencies and thus stimulating an economic revival following a short-term crisis. Austerity will not allow this to happen, so exposed countries are forced to live with seemingly permanent recession. So long as the eurozone crisis keeps the euro exchange rate competitive, German exporters benefit and the German economy continues to grow.
This is not, as some would like to suggest, a German conspiracy. To the Germans it just seems like common sense, but it is also true that everyone goes into these things with their own interests at heart while convincing themselves they are acting in the best interests of everyone.
So too with the financial fair play regulations. Under Uefa’s rules, clubs are penalised if they lack liquidity, while EU rules against state aid prohibit a government bailout for insolvent clubs. Traditionally strong clubs from southern Europe are now being forced to live within their ever decreasing means, and this football austerity is also likely to benefit Germany.
German clubs were at the forefront of pushing for financial regulation at the European level to match their own regulation at home. Thanks to public investment in new stadiums for the 2006 World Cup, generous sponsorship from Germany’s industrial giants and a wealthy population of 80 million, German clubs are set to outspend their southern neighbours in the years to come, reversing a decade or more of weakness.
Many people argue that Europe’s austerity policy is not tenable in the long run if it impoverishes the poorer nations, and much the same can be said of the financial fair play regulations. Sound finance is a worthy goal, but not if it guarantees German and English dominance (in the latter case funded by international broadcast income) at the expense of the game’s traditional southern powers.
Mervyn King and senior German banker warn of ‘unexpected twists and turns’ before worldwide economy stabilises again
Sir Mervyn King warned last night that the global financial crisis is “far from over” and that fundamental changes are needed to the international system before confidence can be regained.
King, the governor of the Bank of England, said there would be many twists and turns before the worldwide economy stabilises. Speaking at an event at the London School of Economics, he said: “Whichever crisis we are talking about, it is far from over … there will surely be many unexpected twists and turns before we can truly say that the crisis is indeed over.”
On the day after the Cypriot government put forward a rescue package to stabilise its economy, King’s comments will reinforce concerns that the eurozone has failed to put its house in order. The event was also attended by Ben Bernanke, chair of the US Federal Reserve, who voiced concerns about fundamental imbalances exposed by the financial crisis. He said that while the eurozone works for some countries, it was obvious that others were unable to keep up. “There is a basic question: what is the right size for a single monetary policy?” In a clear reference to Greece, Portugal and Cyprus, he said the crisis had exposed countries with weaker productivity and higher labour costs.
The former head of the German central bank, Axel Weber, also speaking at the event, added to the warnings that the crisis had yet to play out in full. “We are not out of the woods yet,” said Weber, now chairman of investment bank UBS. Weber emphasised that the colossal debts run up by western countries in the aftermath of the banking crisis remained a huge drag on economy growth and stability. “While there be more signs of stability, this may in fact be a period when problems that are still with us resurface. The underlying situation remains difficult and is not improving,” he said.
He said the soaring stock market had provided a false hope that the eurozone crisis has eased. Weber joined former US treasury secretary Larry Summers and IMF chief economist Olivier Blanchard on stage at the London School of Economics to mark the end of King’s 10-year term as Bank of England governor.
King will retire in the summer and will be succeeded by the head of Canada’s central bank, Mark Carney, who was in the audience along with many of the world’s top economists and central bank staff.
Weber said he was also concerned that governments had responded to the crisis by giving more powers to central banks. He recalled how he refused an offer from the German finance ministry to take on regulatory powers, fearing it would undermine the bank’s monetary policy role. “As central banks play a larger role, we need to see the potential downsides,” he said. “I’m concerned they are taking roles that distract them from their main task.”
Blanchard said the powers acquired by central banks created a “democratic deficit” that could eventually lead to social unrest. The situation in Europe was a cause for concern, especially when central banks were put in a position of making crucial decisions that affected millions of people’s lives, he said.
His comments echoed those of many politicians across Europe after the crisis in Cyprus was exacerbated by demands from the European Central Bank for a resolution. The ECB warned last week that it would refuse to lend to banks in Cyprus unless a deal was struck, pushing the government on the island, which is only four weeks old, to accept demands from Brussels for an initial €5.8bn (£5bn) cash payment to secure loans worth €10bn. Bernanke defended the policy shift that has seen central banks assume regulatory powers, arguing that it provided a unique view of the way that international money markets operated. “It is important for central banks to be regulators to understand the financial system and how it is developing,” he said.
German Finance Minister Wolfgang Schaeuble warns Cyprus that its banks may never be able to reopen, after its parliament rejected a bailout deal.
Read the original: Cyprus warned over bailout rejection
3,000 military personnel and 250 civil servants protected from tax imposed as part of island’s bailout by EU and IMF
The savings of British military personnel and civil servants in Cyprus are to be protected against a bank levy being imposed as part of the island’s €10bn (£8.7bn) bailout, the government has revealed.
An estimated €2bn of British deposits are held in Cyprus, including accounts for 3,000 military personnel and 250 civil servants. The chancellor, George Osborne, told The Andrew Marr Show on BBC1 on Sunday: “For people serving in our military, people serving our government out in Cyprus – because we have military bases there – we are going to compensate anyone who is affected by this bank tax. People who are doing their duty for our country in Cyprus will be protected from this Cypriot bank tax.”
He said Cypriot banks based in the UK would be unaffected by the 9.9% levy on savings over €100,000. There will also be a 6.75% levy on savings below €100,000 as part of the fifth eurozone bailout, agreed early on Saturday by the European Union and the International Monetary Fund.
The news that Cypriots would have their savings raided to bail out the country’s ailing banks has threatened to reignite Europe’s debt and currency crisis.
Small and medium-scale savers in Greek Cyprus voiced outrage at the one-off tax on deposits. Mounting opposition led to a crucial emergency parliament session on the deal being put off until Mondayin Nicosia.
President Nicos Anastasiades, only in his first weeks in office, warned of a catastrophe if the plan was not accepted as he came under intense pressure from the eurozone and European Central Bank to ensure the levy was enacted.
Cypriot banks are to remain closed for several days following the move, unique in three years of turmoil over eurozone sovereign debt. But the knock-on effect, undermining confidence in pledges from EU leaders that ordinary savers are safe from financial chaos, fed fears of runs on banks in other vulnerable countries, such as Spain and Italy.
Cyprus is the first eurozone bailout to hit savers, breaking repeated vows from politicians, including Anastasiades recently, that such a tax would not happen.
However, it is far from the first time the public has been forced to meet banks’ failings. In Ireland, the taxpayer paid for the colossal costs of bank failure. In Greece last year, private investors were forced to take “haircuts” on their investments in struggling Greek banks. The German government, driving this policy, declared repeatedly that Greece was “unique” and that this would never happen again.
Similar statements about Cyprus were issued at the weekend, despite earlier promises that all European deposits under €100,000 were safe in the banking crisis. A European commission spokesman said that the guarantee applied only to a banking collapse, not to a banking rescue, confirming that small savers’ money was safer in the case of bankruptcy.
The German government and the International Monetary Fund, both drivers of the surprise depositors’ tax scheme agreed early on Saturday in Brussels, voiced satisfaction. The IMF chief, Christine Lagarde, said: “The IMF has always said that we would support a solution that is sustainable, that is fully financed and that appropriately allocates the burden sharing. I believe that the agreed package meets these three objectives.”
But on Sunday in Nicosia, the new Anastasiades government struggled to muster the parliamentary support required to get the bailout package through.
Martin Schulz, head of the European parliament, while agreeing that savers should bear some of the bailout costs, called for changes to exempt those with savings under €25,000.
Sharon Bowles, the Lib Dem MEP who chairs the parliament’s monetary affairs committee and has been closely involved in the euro crisis, was withering. “The single market has been sold down the river for a shoddy price,” she said.
“This grabbing of ordinary depositors’ money is billed as a tax, so as to try and circumvent the EU’s deposit guarantee laws. It robs smaller investors of the protection they were promised.
“If this were a bank they would be in court for mis-selling. The lesson here is that the EU’s single market rules will be flouted when the eurozone, European Central Bank and IMF say so.”
Cyprus is a major haven for the funds of wealthy Russians, with the German intelligence service recently estimating up to €20bn in Russian deposits. Unless they have been part of a recent capital flight, the Russians stand to lose fortunes under the 9.9% levy.
Anatoly Aksakov of Russia’s regional banking association said confidence in the Cypriot banking sector had just been wiped out.
“The Russians have lost €3.5bn in a day,” said Forbes Magazine. The IMF insisted on raiding savers’ accounts to bring down the cost of the eurozone/IMF bailout to €10bn on the grounds that the €17bn needed by Cyprus would raise government debt to unsustainable levels.
The Germans supported the levy to ensure that wealthy Russians contributed and that German taxpayers were not paying out to secure Russian money. And it appears that Anastasiades insisted on spreading the levy to ordinary savers to lower the burden on the wealthy and try to prevent them fleeing Cyprus as a low-tax banking haven.