Europe Cannot Take Bold Steps To Either Seriously Integrate Or Force the Weak Out – It Will Continue With Small Steps That Will Ensure A Perennially Smoldering Crisis

[the-subtitle ]

By Paolo von Schirach

June 7, 2012

WASHINGTON – Mario Draghi, the President of the European Central Bank, has been pushing the EU institutions to confront the smoldering debt crisis by taking bold actions that will result in a real European fiscal union and a lot more. And he rejects pressures to take actions that would provide short term relief. Any of this would simply mask EU inaction.

Not for the monetary authority

Indeed, on June 6 Draghi justified the ECB decision to hold interest rates steady at 1% by stating that: “I don’t think it would be right for monetary policy to fill [in for] other institutions lack of action”. He added that the EU serious problems have “nothing to do with monetary policy“. The message from the head of the Central bank is clear: Europe’s problems are mostly rooted in an incomplete Union. This is about politics, not monetary issues.

But Europe will not follow Draghi’s advice. Europe moves along slowly, following a tried script of endless negotiations that usually yield modest results. Each crisis is dealt with piecemeal, one by one. Yesterday it was Greece, today it is Spain.

Weak countries in debt

Europe’s crisis originates in the structural weakness of some of its Southern members, large ans small. Italy, Spain, Portugal and Greece are saddled with unproductive economies coupled with bloated and unaffordable public sectors, while the people expect welfare programs not paid for. The outcome is what we all know: the unsustainable debt levels that triggered the crisis.

A truly “European” solution

Confronted with this crisis, Europe has choices. A truly “European solution” would be to “take over” the laggards and teach them about modernity, responsible government and productive economic practices. This would be done in return for aid and subsidies. In other words, “We take care of you, but in return you go to our school and learn how to do things properly, so that you get out of this mess once and for all“. If a true “European Spirit” existed, this is what Europe should do: take care of its own with a sense of collective responsibility.

But the problem is that there is no such “European Spirit”. Ask the Danes or the Dutch how would they like to care of Greece or Italy for at least a decade, so that they will be properly reformed. By the same token, the laggards would never accept to be labeled as semi-failed states in need of crash programs. So, forget about the radical solution that would be based on a real and truly shared integration project.

Force the weak countries out

At the opposite end of the spectrum, Europe would tell the laggards to get out of the Euro and possibly downgrade other forms of association with the larger EU. This would mean that the project of a Big Europe, with everybody in, failed. The discrepancies between North and South are simply too large and therefore a real Union is not possible.

Of course, getting rid of the laggards would be complicated, not to mention costly. But, to the extent that everybody agreed, a piloted, orderly exit from the Euro is not an impossible, crazy idea. But you can bet what you want that this will not be done. It may be the solution for impossibly immature and potentially ungovernable Greece. But in the case of bigger economies such as Spain or Italy, this will not be done. And yet these two countries are terminally ill. By no means not near death, but taken over by chronic fatigue.

Forget about radical solutions

So, forget about real integration as a cure. And forget also about a refined Eurozone where only the big boys belong. Both solutions appear too complicated. Too much effort. Too costly. Too many variables. Too many unknown consequences.

Greece will be in a perpetual crisis

This being the case, we are left with the current European approach. Big talk and little action. Incremental steps that should do the trick and generally do not. Just think of this. Greece is a small country, with a small economy. You would think that a European Union with 27 members and a Eurozone with 17 should have been able to take care of a smallish country, whatever its conditions. Well, no. The Greek debt crisis exploded in the Fall of 2009. Now we are in the middle of 2012 and we are far from a settlement that can give anybody confidence that the worst is behind us and that now we are on path of healing and recovery. Rescue plans notwithstanding, Greece is virtually bankrupt, while its economy has lost any vitality. The people are angry and despondent. Until new elections, there is no government and any future coalition is likely to be weak and fractious.

Spain and Italy in trouble

Spain is in big trouble. The banking system is shot. The regional governments are bankrupt. The economy is in bad shape with a gigantic 24.4% unemployment, while youth unemployment is a stunning 50%.

Italy is doing much better in terms of its current fiscal outlook. But the country would need dramatic public administration reforms, coupled with the creation of a truly pro-business environment that would encourage innovation and enterprise. None of this is happening. Meanwhile unemployment is at 10.2% while the economy is back in a recession.

No political will

In the end, Mario Draghi is right. It is both wrong and stupid to expect the European monetary authorities to perform miracles. The issues are political. But, sadly, the European leaders are not even remotely capable of addressing them.

Bad Regulations, Outdated Systems Neutralize The Advantages Of Cheap US Energy – Power Outages in Texas?

[the-subtitle ]

By Paolo von Schirach

June 5, 2012

WASHINGTON – There is no question that the shale gas revolution is an extraordinarily positive economic development for the entire American economy. Cheap and abundant domestic energy is a real tonic for a battered system. There is no doubt that its ripple effects will become more significant as more sectors –from the plastic industry to fuel for heavy trucks– will be positively affected in the years to come. That said, it would appear that rock bottom prices cannot counter balance negative currents, right in the middle of some gas producing regions.

Pittsburgh has lots of natural gas

Take Pittsburgh, in Western Pennsylvania. The city, once upon a time the center of the US steel industry, today is right in the middle of the Marcellus shale, that is to say at the very center of the shale gas revolution. Beyond power generation, natural gas can be used as transportation fuel and it is particularly cost effective for large trucks and buses, that is vehicles that are used a lot and consume a great deal of fuel.

For this reasons, I would have thought that Pittsburgh would be first in line to have the best public transportation system in America based on super efficient buses powered by its very own, locally produced, natural gas. Well, it turns out instead that the Pittsburgh Port Authority is semi-bankrupt and that it is planning dramatic service cuts in order to stop the bleeding.

Public transportation in crisis

A story on this crisis in the WSJ makes no mention of natural gas powered buses. It describes instead huge legacy costs and high medical insurance burdens for employees and retirees that stress the Authority’s budgets.

Without getting into all the details of who subsidizes what and by how much, one thing is clear. While the cheapest transportation fuel in the Western world should be a major advantage for the Pittsburgh bus system, apparently this is not nearly enough. Other factors weigh so heavily on the total costs for the bus system that the cheap fuel advantage becomes irrelevant.

This is truly worrisome. This means that in America we have developed an almost uncanny ability to mismanage public services so that they become unaffordable, even when some basic operating costs –fuel in this case– could be dramatically reduced.

Power cuts in Texas?

Change state and sector; but a similar issue. Texas is also an energy rich state with lots of new gas. Well, guess what: Texas will soon experience power outages because of lack of new power plants. On the face of it, this is totally counter intuitive. You would think that cheap gas would make it easy to supply more energy to more people at a lower cost. Well, not so.

The maddeningly complicated maze of regulations and rates settings for utilities conspire to obtain the opposite effect. It turns out that in the current scenario shaped by very low rates it is not profitable to build new power plants. If rates could be increased (a lot) then the utilities could see profits down the line and would build more generation capacity. But now they do not, and so Texas risks power cuts.

This is totally absurd. I know very well the predicament of poor countries in which energy is scarce because it is prohibitively expensive. But projected power outages in Texas? Right in the middle of a a historic natural gas revolution, with super abundant supplies of cheap energy?

Just like in the case of Pittsburgh forced to cut bus services, here we see the effects of counter productive regulations and arrangements that end up neutralizing even the impact of what should be unquestionably good news for the economy and for the general population.

Natural resources matter, enlightened public policies matter even more

The lesson here is that natural resources matter –a lot. But stupid regulations, outdated union contracts, complicated administrative rules and assorted anti-economic customs matter even more. Think of this: Taiwan and Singapore have zero natural resources, and yet they prosper simply because of enlightened governments that do think about prosperity and do what they can to promote it, not hinder it.

Viceversa, here in America we seem singlemindedly devoted to nullify even the advantages that geology and the ingenuity of the energy industry brought to us. This is disheartening.

Awful Jobs Numbers Hurt Obama – Good News For Romney – Still, To Get On A New Course, America Needs Political Compromise, No Matter Who’s President

[the-subtitle ]

By Paolo von Schirach

June 1, 2012

WASHINGTON – The most recent US jobs report is pretty awful. The Stock Market reacted with a tumble that eradicated all 2012 gains. Only 69,000 new jobs added last month, while previous months have been adjusted down, ( GDP growth is also smaller than we thought). These new jobs numbers are not even half of what is needed just to keep up with population growth. No way to reabsorb the 12.5 million unemployed with such pitiful increments. As the US president is rated mostly on his ability as a steward of the US economy, disappointing employment numbers just months before the elections is especially bad news for incumbent Obama. His case for re-election all of a sudden has become much weaker.

Bad news is good news for Romney

For Republican challenger Mitt Romney instead the bad news is good news. The worse the economy, the stronger his case that we need new management in Washington, because Team Obama is just not up to the task. Will Mitt Romney get elected in November? Who knows. But certainly, if the economy stays in relatively poor shape, despite Romney’s public relations problems as a millionaire and despite the perception that he and the Republicans are against women rights, he may just make it. When things seem to go south, Americans are much more inclined to change coach.

That said, all this is about the political ramifications of a weak economy for which there is no easy fix. But I’am afraid that changing presidents may not change much, unless the broader climate changes as well. The problems are just too big.

Recovery slow and painful

Regarding the current contingency, let’s remember that we got into this deep trouble because of high debt –private and public– accumulated over a long period of time. De-leveraging is a long and complicated process. It takes a long time to pay back. In the meantime, with much less cash in hand, Americans spend less and so they do not pull the economy forward. By the same token, a heavily indebted federal government cannot invest.

Structural issues

But, beyond the current cycle, as nasty as this one is, America’s real problems are structural, and they cannot be addressed without a new national consensus. We need to retrain millions of people whose jobs disappeared because of Asian low cost competition and because of automation. We need to vastly improve our public education system in order to upgarde the quality of our future human capital. And, of course, we need to reform federal spending –and this means entitlements, (60% of total spending), with Medicare and Medicaid as the number one and two issues. And add to the mix badly needed fiscal reform, including simplification and the elimination of “tax expenditures”, meaning loopholes and special treatment for all sorts of privileged categories and sectors.

Nothing will get done without a new consensus

What does all this mean? It means that the magnitude and the complexity of the issues require a new policy consensus in Washington. No consensus, no far reaching reforms. No reforms, no fresh impetus for the US.

This anemic economy may very well be just what Romney needs to get elected. But then President Romney, short of a political earthquake that would wipe out the Democrats in the House and Senate, will be stuck in political gridlock just as Obama is today.

Again, America’s problems are systemic. And systemic issues can be addressed in this country only with a significant degree of cooperation between the two major parties. Sure enough, leadership from the man in the White House matters; but it cannot be everything. Short of renewed cooperation between less ideological Republicans and Democrats, there will be a stalemate under President Romney come January 2013 as there is a stalemate today under President Obama.

Compromise in the name of the national interest

American political leaders need to rediscover the art and especially the virtof dialogue and compromise in the name of the national interest. If the current ideological confrontations continue, then it will be just more political paralysis, with negative effects on federal finances and the economy, no matter who is in the White House.