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Europe faces make-or-break day

Publication Date : 11-09-2012


Europe is bracing for a day that could rewrite its future. September 12 - tomorrow - will be a decisive day that could make or break the euro zone and the global financial system.

Four major watershed events are occurring on this day of reckoning. At 10am, the Federal Constitutional Court of Germany is scheduled to rule whether or not it is constitutional for the country to take part in bail-outs of weak member states of the European Union.

Meanwhile, The European Central Bank will submit proposals to bring European banks under one umbrella in a banking union. An election will be held to determine the Netherlands' future in Europe. And in the United States, the Federal Open Market Committee will meet to decide whether it will launch another buying programme for asset-backed securities, known as quantitative easing, third round (QE3).

While the ruling of the German court, which will determine that country's future in the euro, remains unknown, George Soros, the 82-year-old international financier, has called on the Berlin to assume a leadership role in dragging the euro zone out of recession.

This, he said, could be done by boosting growth to around 5 per cent, creating a joint fiscal authority to manage the European Financial Stability Mechanism and the European Financial Stability Facility, and guaranteeing common bonds. Otherwise, Germany should leave the currency union to save the future of Europe.

"Lead or leave: This is a legitimate decision for Germany to make," Soros said. "Either throw in your fate with the rest of Europe, take the risk of sinking or swimming together, or leave the euro, because if you have left, the problems of the euro zone would get better."

Dr Sutapha Amornwiwat, the chief economist of Siam Commercial Bank, told The Nation that all eyes were focusing on the German Constitutional Court's ruling tomorrow. But she said that if Germany ended its participation in the bail-out fund, it would not significantly hurt the prospects of the European Financial Stability Mechanism.

"Already the ECB's announcement of the bond-buying programme has pushed down the yields of the Spanish and Italian bonds," she said.

Jens Weidmann, governor of the Deutsche Bundesbank, delivered the sole dissenting opinion in the ECB's decision last Thursday to mount a bond-buying programme to help bring down the government bond yields of the weak EU states. He has threatened to resign from his position several times over his disagreement with the ECB's action, which, he argues, flouts monetary and fiscal discipline.

Mario Draghi, president of the ECB, has announced an unlimited bond-buying programme to save the euro. The Outright Monetary Transactions, similar to the US Federal Reserves' quantitative-easing programme, will buy up sovereign bonds of the weak EU states in exchange for strict conditionalities, including economic and financial restructuring, a fiscal union, a banking union or political union.

With the disparity between the economic structures of northern and southern Europe, the only way to save Europe is to embrace a full-fledged integration, leading to the end of nation-states. This would allow a transfer of wealth from the stronger states to the weaker states, he said.

Axel Merk of Merk Funds said a United States of Europe was in the making with the tactical move of the ECB's bond-buying programme and other conditionalities attached.

"A fiscal union, a banking union, a United States of Europe has arrived! Don't believe it? Just like many newborns, this one has its share of wrinkles, but what you see is what you get," he said.

Across the Atlantic, the Federal Open Market Committee is likely to take some cues from Ben Bernanke, the US Federal Reserve chairman, to embark on QE3 to prop up the US financial system. Bernanke has hinted there is scope to undertake further monetary easing, since economic growth is weak and unemployment remains high.

William Lee, chief economist of Citibank in New York, told The Nation the Fed was definitely going to launch QE3, because it had hinted via different signals that it would do so. Normally, the Fed does not want to surprise the financial markets, he added.

The prospects of money-printing programmes by both the ECB and the Fed have raised concerns over higher asset prices and inflation.

The Asian Development Bank (ADB) warns that increased capital flow from the West as central banks embark on easing measures could lead to a surge in volatility and create asset bubbles.

"Near-zero policy rates in mature markets and continuing hints from the US Federal Reserve over the possibility of more stimulus, should conditions warrant, have sparked fears in emerging markets of a surge in capital inflows," the Manila-based ADB said in its latest report on the bond market, released yesterday.

"These inflows can cause large exchange-rate fluctuations, affect trade, and ratchet credit growth - leading to asset price bubbles," the bank said.

It added that policy-makers should also be aware of the possibility of money being pulled out of the region all of a sudden.


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