16th Aug LATE - United States of Europe?

Herman The Great

Summary: Merkel/Sarkozy meeting over, message: budget balancing and better governance in PIIGS, a financial transaction tax, a new pan-European economic government and national laws on balanced budgets – oh yeah, and more Herman van Rompuy. Dear God.

Views: EURUSD still in range, latest trade suggestion returned only 20 pips. I’ll try harder next time. No recommendations at the moment. Next week we’ll get the latest figures on how much the ECB has been buying PIIGS debt this week. Then maybe someone will notice ECB’s balance sheet situation and the fact that it cannot continue buying for much longer, perhaps only couple of weeks.Obviously, something must happen really soon. My current end game  scenarios are as follows:

 

A) Euro breaks up 

 a) PIIGS-countries (or some of them) leave or are kicked out of the currency union, or b) core countries leave the currency union.Both leave open the choice between forming a new regional currency union or returning to national currencies. At least this solution worked in 1992.

B) Integration (eurobonds, fiscal union)

United States of Europe. The federal treasury emits bonds, and individual countries get financing under strict criteria. Or, if the countries want and can, they can also go to the open markets themselves. At least this solution has worked in U.S., but it was and is a whole lot more an optimal currency area than euroland.

C) ECB goes nuclear

ECB purchases 1-2 trillion euros worth of government bonds, i.e. European QE. The bonds could be cancelled after the purchase. The confidence in euro as a currency would take a permanent hit. Of course, ‘pressing the button’ would require a credible threat that this is the first and last time, and no sovereigns or banks will be saved again in this manner in the future. Did this work in the U.S.? No.

D) Muddling through

Increased ESFS, bail out packages, occasional bond purchases by ECB, more of the same. As the national debts are not convincingly cut, this will simply not work – not unless they find oil in Greece, gold in Italy and a cure for cancer in Portugal. Has this worked? No.

MERKEL / SARKOZY MEET

“several new measures, some substantial, some speculative, some silly.”

Eurobonds – not now but not never – alphaville FT

France, Germany Rule Out Euro Bonds to Fix Debt Crisis - CNBC

El-Erian: What to make of the Franco-German Summit – alphaville FT

Sarkozy, Merkel Propose Balanced Budget Amendments for 17 Eurozone Nations, a Financial Transaction Tax and a "True European Economic Government" – Mish’s

No eurobond, EFSF the same, and a financial tax – The Big Picture

Stocks Fall as Europe Floats Financial Tax – BB

Sarkozy and Merkel Propose Steps to Shore Up Euro-Zone Governance – WSJ

Merkel, Sarkozy Propose Closer Regional Cooperation, Shunning Euro Bonds – BB

Sarkozy and Merkel push euro integration – Reuters

Instant view: Sarkozy, Merkel push euro zone ties – Reuters

Analysis: France, Germany set out next stage of EU integration – Reuters

G20 countries currently levy four types of financial transaction taxes, equity, debt, foreign exchange and revenue.  Pros and cons, from Matheson’s working paper

Taxing Financial Transactions: Issues and Evidence – IMF

EURO CRISIS

The Sucking Sound of Liquidity Draining from Eurobank Market – EconoMonitor

Germany sinks with the periphery. Euro crisis solution is the only way out

Europe's economy: Trouble at the core – Free exchange / The Economist

What Is the Secret to Germany’s Economic Success? Part 2 - EconoMonitor

Germany, France Slide Toward Recession; German Economy on Verge of Contraction – Mish’s

“Had the ECB known this at the start of Europe’s debt crisis, it might have resisted taking so many risks with its balance sheet and reputation. Then again, it probably could not have done otherwise”

Europe’s Central Bank at Sea – Project Syndicate

EMERGING

Brazil Needs To Grow Less, Says Nomura - Forbes

CEE: caught in Germany’s downdraught – beyondbrics FT

Mortgages in CHF sounded like a good idea in 2007-2008

Poland: little relief for Swissie-borrowers – beyondbrics FT

Very good summary. Problems: inflation, investment reliance, debt. Now growth is also a problem.

China’s Economic Slowdown Within A Global Slowdown – Also Sprach Analyst

Daiwa’s Kevin Lai suggests believes slowdown is more serious than headline numbers suggest

China Growth Slowing Sharply, Recession in Hong Kong, as Real Estate Speculators and Fake Divorces - HistorySquared

Stronger yuan could help against inflation? As deposit rates are capped, high inflation forces households and businesses to invest, purchase stocks and real estate, inflating an asset bubble.

China official paper calls for widening of yuan – Reuters

China Increased Treasury Holdings for Third Month in June as Demand Waned - BB

Notice that majority of FDI comes from H.K. and off shore entities. FDI is to a large extent Chinese money, cycled abroad.

Foreign Investment in China Jumps 20% as Nissan, McDonald’s Woo Consumers - BB

OTHER

Prices of internationally traded assets are affected by local factors

International asset markets remain largely segmented: Dallas Fed paper – centralbanking.com

NY Fed Primary Dealers Report – Stone Street Advisors

Morgan Stanley’s Global Economic Forum

Global: Structural Alpha, Cyclical Beta

U.S.: Review and Preview

Japan: Same Party, Different Dreams: Noda versus Mabuchi in the DPJ Election

Brazil and Mexico: Is it Different this Time?

H.K.: Bracing for a Double-Dip?