Some readers are asking whether issuing EU bonds is possible under the Maastricht Treaty. The answer would seem to be yes, under article 119. As follows:

Article 119

1. Where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the common market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty. The Commission shall state what measures it recommends the State concerned to take.

If the action taken by a Member State and the measures suggested by the Commission do not prove sufficient to overcome the difficulties which have arisen or which threaten, the Commission shall, after consulting the Committee referred to in Article 114, recommend to the Council the granting of mutual assistance and appropriate methods therefor.

The Commission shall keep the Council regularly informed of the situation and of how it is developing.

2. The Council, acting by a qualified majority, shall grant such mutual assistance; it shall adopt directives or decisions laying down the conditions and details of such assistance, which may take such forms as:

(a) a concerted approach to or within any other international organisations to which Member States may have recourse;
(b) measures needed to avoid deflection of trade where the State which is in difficulties maintains or reintroduces quantitative restrictions against third countries;
(c) the granting of limited credits by other Member States, subject to their agreement.

Indeed not only are such bond possible, the initiative has already been taken in the case of the Hungary bailout last November:

“The European Commission stands ready to provide a loan of €6.5 billion to Hungary,” the EU executive said in a statement on Wednesday (29 October), adding that “the concrete modalities will shortly be finalised in cooperation with the Hungarian authorities”.

Under the plans, the Commission will borrow money from the markets using EU-denominated bonds and then lend it to Hungary, without drawing from the EU budget. The facility is established under Article 119 of the Treaty.

It is the first time that Brussels has used the instrument to help an EU country (see background). The facility foresees an overall ceiling of €12 billion of outstanding loans. This funding is limited to EU countries which are not part of the euro zone.

The money will be collected on the financial market on behalf of the European Community. Rulesexternal governing the use of the facility enable the Commission to issue directly “up to €4 billion” in EU bonds, with maturities ranging between three months to 30 years. “The size reflects a realistic assessment of near-term financing needs and could be rapidly increased at the Commission initiative, if needed,” according to the EU executive.

Goldman Sachs and Deutsche Bank are responsible for placing the bonds with European and international investors.

That’s it for this post. I will write separate posts about each of the four items in my package of proposals about how to respond to the crisis over the days to come. Basically the one I put up earlier today explaining “credit crunches” and “liquidity traps” in connection with the kind of issues which might likely lie in front of us was a sort of theoretical precursor, even if it is rather obscure and theoretical. I’m afraid these things are already becoming household words.

“Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?” Paul Krugman asked his readers back in Novermber last year. In fact on reading this I felt immediately filled with the urge to stand on my chair and shout out loud across the Atlantic to him “Hi Prof, yes me”, since – to plagiarise a phrase from Robert Lucas – scarcely a day has passed since the 9 August 2007 (the day PNB Paribas found themselves short of $2 billion dollars to “close” their books) when I have not been thinking about this. In fact, despite the many bad things that can obviously be said about the present crisis, it does have one saving virtue – it enables many of us economists to get “close up and personal” and take a ringside seat and really see for ourselves, and at first hand, just how things may actually have worked back then. In this sense I would like to extend my profound thanks and deep gratitude to each and everyone of the 45 million Spanish men and women and the 140 million odd Russians who are idling away their time at the moment running round and round the treadmill, all in the cause of helping me triangulate, and sort out a few nagging questions that have been haunting me ever since my late adolesence. Continue reading →

The world’s major economies could emerge from recession by the end of this year, boosted by low commodity prices, reduced interest rates and government stimulus packages, said European Central Bank Governing Council member Christian Noyer. “Several factors make us think it’s not unrealistic to imagine pulling out of recession by the end of the year,” Noyer, who is governor of the Bank of France, said in an interview with France Culture radio.

Advanced economies are already in a “depression” and the financial crisis may deepen unless the banking system is fixed, International Monetary Fund Managing Director Dominique Strauss-Kahn said. “The worst cannot be ruled out,” Strauss-Kahn said in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”

Personally I’m with Strauss-Kahn, I think there is massive downside risk out there. Noyer is being over optimistic, but then France is perhaps the least badly affected EU member. Incidentally Strauss-Kahn has also come out in favour of greater eurozone economic coordination, although he doesn’t mention the idea of EU bonds.

Stability in the euro zone will be in danger if governments do not coordinate more closely on economic policy, the head of the International Monetary Fund (IMF) was quoted as saying by German weekly Zeit on Wednesday. “The euro zone needs more cooperation on economic policy. Otherwise, differences between states will become too big and the stability of the currency zone is in danger,” IMF Managing Director Dominique Strauss-Kahn told Zeit in an interview.

And maybe someone somewhere is listening to him, since Merkel and Sarkozy are about to announce a new initiative. Or could it be that Tremonti’s threat has moved someone somewhere, after all we have no news of any bank bailout in Italy, and then again there is nothing like the prospect of a “systemic” bank failing to concentrate the mind.

Germany and France will present a joint initiative to help Europe better cope with crises like the current economic turbulence, Chancellor Angela Merkel and President Nicolas Sarkozy said on Saturday. “We will approach the Czech presidency (of the European Union) with a joint initiative by Germany and France on how we can emphasise Europe’s strength in these difficult times,” Merkel told reporters in Munich.

This is all purely precautionary, you understand, nevertheless:

The International Monetary Fund is holding talks with Poland, central Europe’s largest economy, on a possible loan to fend off contagion from the global financial crisis that forced the Fund to intervene in Hungary.

“The Poles are saying that they are okay today and I think they are right,” IMF Managing Director Dominique Strauss-Kahn said on Saturday after he attended a central bankers meeting in Kuala Lumpur. “They also say its not impossible that in the future they may be under pressure, so we are discussing with them to see if they need or don’t need more global (agreement) with the Fund,” Strauss-Kahn said.

According to research from investment bank UBS, Poland is the sixth most vulnerable of its universe of emerging market economies based on its short term financing requirements as a percentage of gross domestic product versus its reserves. That means it is reliant on market financing, something that is in short supply as banks shy away from lending outside home markets and credit is in any case in short supply.

You can read the background to the present situation in my two posts “Poland To Consider Interbank Guarantees As The Forex Lending Crisis Deepens” (October 2008) and “The Forex Lending Crunch Means Trouble Is Looming Large In Poland” (January 2009). Continue reading →

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views.
Paul Krugman

As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there’s a sense, watching the process so far, of low energy. What’s going on?
Paul Krugman

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture. Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.
Martin Wolf

OK, I think no regular reader of this blog could seriously suggest I have much sympathy for the sort of views you normally find being propagated by Italy’s Finance Minister Guilio Tremonti, but when he starts to send out the kind of red warning light danger signals that he has been doing over recent days, then I think we should all be taking note, and when the republic is in danger, then its all hands to the pumps, regardless of who is sounding the alert. This is not a brainstorming session, it is a real flesh and blood crisis. Continue reading →

Well don’t any of you ever accuse us of being behind the curve on this blog. The Financial Times is now running a story about how some “whacky politicians” (sorry, members of the the ruling Liberal Democratic party) in Japan are dusting down plans for the government to introduce its own private currency to rival the country’s official one (aka the Yen) issued by the Bank of Japan. To understand what this post is about, and see its relevance to potential events in the eurozone (and in particular in Spain, given the presence of Argentina-style politicians like Miguel Sebastian in the government), see this post here. Of course, maybe they have just been carrying out an extremely literal reading of Gauti Eggertsson’s “How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible” right down to the small print. Continue reading →

Industrial production in Germany fell by 4.6 per cent in December, more than in any month since German reunification in 1990, according to the Economics Ministry in Berlin today. This follows a 3.7 per cent fall in November. As a result output fell by a record 12.0% over the December 2007 figure.

On Thursday, the Economy Ministry reported that German new orders fell 25.1% in the 12 months to December, falling 6.9% on the November number. Which means there is worse to come, a feeling which is only confirmed by the German January Purchasing Managers Index which showed that manufacturing contracted at its fastest pace in over 12 years in January as further slumps in demand also lead employers to cut staff at a record pace. The headline index in the Purchasing Managers’ Index fell to 32.0 in January from 32.7 in December, bringing it further below the 50.0 mark separating contraction from expansion.

Spanish industrial production fell by a record 20 percent and bankruptcy proceedings almost quadrupled as the credit squeeze pushed the country’s debt-laden economy toward its worst recession in half a century. The 19.6 percent annual decline in production at factories, refineries and mines in December followed a revised contraction of 15.3 percent in November, adjusting for the number of days worked, the Madrid-based National Statistics Institute said today. The number of Spanish companies starting bankruptcy proceedings in the fourth quarter rose to 960 from 260 a year earlier, a separate report showed.

“It’s like a cluster bomb,” Salvador Bellido, president of the Confederation of Small- and Mid-Sized Companies, said in an interview. “Even the food sector, which shouldn’t really be suffering in such a situation, is suffering.” Spain’s auto industry, which accounts for about 5 percent of GDP, has started laying off workers as sales plunge. Nissan Motor Co. said it would cut 38 percent of workers at a Spanish factory and Renault SA won approval to temporarily lay off as many as 10,311. Vehicle production dropped almost 48 percent on an unadjusted basis in December, today’s report from the statistics institute said. The government has pledged 800 million euros in aid to help the industry weather the crisis. “There will be more mass job cuts in the industrial sector in the coming months,” said Jesus Castillo, an economist at Natixis in Paris. “The year 2009 is going to be a difficult one.”

In spite of a slight improvement between November and January (to 31.8 from 28.2), the latest manufacturing PMI data are consistent with a marked decline in industrial production. However, the pace of the fall is likely to slightly decrease in the coming months.These results confirm the extent of the Spanish recession. The contraction in activity should be more pronounced than expected in Q4 2008 (-0.8% q/q, published on February the 12th). More generally, GDP is likely to fall by more than 3.0% in 2009, after +1.2% in 2008 and +3.7% in 2007.
PNB Paribas

The Second Great Depression seems to have now spread from Ukraine, and arrived in Hungary.

Hungarian industrial production fell the most in December since at least 1991 as a recession in western Europe cut export demand and dragged the economy into its worst decline in 15 years. Production dropped 23.3 percent from a year earlier, the seventh consecutive monthly decline, after falling 9.9 percent in November, the Budapest-based statistics office said, based on preliminary data. Output fell 14.6 percent month on month.

And it only looks set to get worse, since Hungary’s manufacturing purchasing manager index (PMI) fell to a all-time low of 38.6 in January, down from 40.8 in December. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hadn’t been below the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year. Gábor Ambrus, economist at 4Cast, in London, estimates that (in part as a result of the gas crisis) output could drop by another 14.6% between December and January, which will give another huge drop in the year on year number.

“What can I say, just terrible. It appears to be weak on both domestic and external sides, but with Hungary a small open economy it is likely to remain under pressure from contracting demand across the globe and the Eurozone in particular……This isn’t just a Hungarian phenomenon however, as German IP today will be weak as will the UK data, albeit not as soft as this number. The business surveys remain weak so it’s difficult to forecast any near term recovery. Consequently, the estimate for GDP growth of -3% this year may soon look on the optimistic side.”
Stuart Bennet, Caylon, London