Cicero's Songs

Over the last week the global financial crisis, as it affects Europe, has changed direction. Several of the critical uncertainties that were dogging the Euro have now been resolved. The German constitutional court has ruled that German participation in the current rescue plan is legal, and that future plans are a matter for votes in Bundestag. The Dutch electorate have sung solidly behind pro-EU parties, and the European Central Bank has begun to deploy substantial firepower directly in the markets. The countries that have advocated greater Eurozone integration seem to be winning the argument, and the focus of debate has moved on towards how and not whether a new European Federation can be constructed. Many on the right in the UK are determinedly contemptuous of these increasingly dramatic developments. As at the Messina Conference , where the founding members of the EEC sent Ministers, while the UK sent a junior civil servant, the UK has- by default- taken a decision not to be ...

As the economic crisis of the West grinds on, I find myself noting that the mistakes of policy are more and more political mistakes, and that the failures of leadership are more and more failures of political leadership.  Attempting to create a safer banking system by forcing increases in reserves, through Basel III or restrictions in concentration, is in fact having almost the precisely opposite effect to that intended. The increase in reserves has not made banks safer, but it has forced a dramatic shrinking in bank balance sheets. The result is a crash dive in lending- especially to the critical small and medium enterprises sector. This is now getting to the stage where, in the words of a senior banker operating across the Baltic and Nordic markets who I was speaking to over the weekend: "within five years, no bank will be able to afford to take on SME lending". This continued credit crunch carries not only short term implications, but also long term implications, since the...

Viewed from the perspective of the Euro's newest member state, the British political and media narrative still seems completely off the point with regard to the single currency. To reiterate: this is not a currency crisis, it is a debt crisis. The majority of the members of the Euro zone have controlled their deficits and are retrenching their debts. It is where deficits are not being controlled- in Greece and in the Latin bloc that the crisis has its centre. There are two sources of deficit pressure: one is fiscal incontinence, that is to say that the structure of debt is wrong or as the result of welfare or other general calls on the public purse government expenses are not being controlled versus government income. The second is the need to recapitalize the banking systems following a largely property inspired meltdown. The scale of the recapitalization is so large, because governments have undertaken not merely to compensate depositors, but all those, including bond holders...

Living in the latest country to adopt the Euro, it is clear that, to say the least, the British media has a "different" perspective on the single currency. If you believe the British press, the Euro not only will collapse, but it should collapse. The propaganda spread by such "newspapers" as the Daily Mail and the Express, is unrelentingly hostile, not merely to the Euro, but even to continuing British membership of the European Union itself. Continuing campaigns against the Union, which is consistently portrayed in the most negative light possible, have undoubtedly contributed to a sharp decline in British popular support for the EU. The polls now show a majority backing British withdrawal from the European Union. However, the departure of the UK is not the same as the end of the European Union, or even the Euro itself. In Estonia, as in many other Eurozone countries, the idea of restoring national currencies is not merely not on the national agenda, it is ...

In Tallinn Spring is slowly advancing into Summer. The Sun begins to offer some warmth and the days are growing long. In London the weather is less good. The rain and storms, that seem inevitable once a drought is declared, are clearly depressing the national mood. In the year of the Diamond Jubilee and the London Olympic games, the national mood still remains rather bleak. Although the local elections will probably be a nasty mid term shock to the coalition government, the elections that really matter to Britain are happening elsewhere. The likely change of government in Paris may see significant changes in French policy- and the demise of the Sarkozy part of the "Merkozy" partnership may simply be the prelude to a change in government in Berlin next year. Europeans have grown weary and disillusioned with the austerity program that has been imposed at the behest of the right wing-led government in Germany. The meltdown in Spain and the continuing crises in Greece and P...

The likely change of President in Paris is now coupled with severe tension in the government in the Netherlands. As in 2005, these two founder members are questioning the long standing consensus in the European Union. Usually, when asked about the future of the Euro, the response from officials and from many national governments is that the solution is "more Europe". This is short hand for creating the common institutions, such as a treasury and a system of fiscal transfers, that were not created when the single currency was first established. The problem about creating such powerful new institutions is that they lack democratic political legitimacy. They may be the most obvious and practical solutions to the crisis, but they are not sufficiently supported in most countries to allow them to happen. The political problems in France and the Netherlands only underlines the difficulties in gaining democratic support for the necessary policies to allow the Euro to survive. T...

Spring has come to Estonia, and it is like the lights have been switched on after the long (overlong) winter. As always, your heart leaps as the huge chains of migrating geese take to the skies, and here and there a newly arrived solitary stork wanders along the field gullies looking for frogs. The grass visibly greens from day to day, and the floors of the budding forest are bright with snow drops and the primrose-like blue flowers, known rather prosaically in Estonian as "blue flowers". Soon the swallows too will be here and the white nights of June will echo to the Estonians enjoying the brief pleasures of the glorious northern summer. Yet work must continue, and I head to Parnu, the summer capital of Estonia, amidst April showers, to take part in a conference to discuss the future options in Estonian finance. For me, Estonian finance, as so much of Estonian society, stands at something of a cross roads. In many ways the last twenty years have been a series of exams for ...

The press reaction to the events of the past few days has been to smear, to misrepresent and to outright lie. As George Monbiot points out in The Guardian today , journalists are now a lickspittle bunch of toadies for their society friends. The circle of journalists is so narrow that any independent thought is being crushed by an isolationist, very right wing groupthink. As the Daily Mail comes out with some variation on Lib Dems support for Europe taxing your granny to give you cancer shock horror and the Daily Express continue to find some spurious excuse to print a picture of Diana, it is hard not to feel a burning anger at the injustice that allows these poltroons to get away with their schtick. Of course the Lib Dems are right to feel that Cameron played to his Eurosceptic gallery rather than the national interest when he wielded a veto that could be ignored. However we also know, as does David Cameron, that if the UK is going to recover, then the Eurozone must recover- and re...

The thunder of the Brussels Summit is only just fading, and it is still by no means clear what happens now. In many ways the summit has created more questions than it has answered.  However, there is no doubt that the relationship of Britain with the rest of the European Union has reached a point of fracture that places the UK outside the core of the organisation. David Cameron has, as he threatened, wielded the British veto, but the consequences were not what he intended. Instead of forcing the other 26 states to address British concerns, they have instead created a separate agreement without the participation of the UK. Although the British have- rather childishly- insisted that this group of 26 not use the facilities, even the offices of the European Union, the fact is that the Franco-German entente has  de facto  expelled the United Kingdom from the new direction of the European Union. The miscalculation that David Cameron has made was not to think beyond the veto...

The Euro debate in Britain takes place in a vacuum. The Euro-sceptics are not challenged, even when they start to resort to absurd national stereotypes and mentioning the war ("I think I mentioned it 73 times, but may have got away with it") in the most inappropriate contexts. The fact is that the image of Britain is so rooted in the Second World War, that we have become imprisoned in a national myth which insists on our unique righteousness and moral certainty. No one is allowed to mention the equivocation that created a culture of appeasement, the rise of the Blackshirts, or the real possibility that instead of "fighting alone" in 1940, a Britain under Halifax would have probably come to terms.  The problem is that the generation that actually took part in the war has more or less passed, and it is the post-war generation that mostly were not even alive at the end of the war that has created this pristine national myth. In the face of inexorable national decli...

The Bank of England made the following statement this morning: In light of the continuing exceptional stresses in financial markets, the Bank of England is today announcing the introduction of a new contingency liquidity facility, the Extended Collateral Term Repo (ECTR) Facility. This Facility is designed to mitigate risks to financial stability arising from a market-wide shortage of short-term sterling liquidity. There is currently no shortage of short-term sterling liquidity in the market. But should that position change, the new Facility gives the Bank additional flexibility to offer sterling liquidity in an auction format against the widest range of collateral. Obviously this follows on from the coordinated action last week, but it underlines that the liquidity crunch that nearly took place carries risks for all non-US$ holders. The rumour that suggests that we came within a few hours of the total collapse of the short term funding market can only be reinforced by today...

In the middle of last week, exceptional measures were announced by a coordinated group of six central banks : the Fed, the ECB, the Bank of England, the Bank of Canada, the Bank of Japan and the Swiss National Bank. In effect they agreed to supply virtually unlimited Dollar liquidity to the market. The result has been a sustained market rally over the past few days. However it is only now beginning to sink in what lay behind the central banks' decision and how close the financial system just came to collapse. It is now clear that the funding cycle, even for the best credits in Europe was getting dangerously short. Whereas a major industrial, like Unilever, could expect to fund US Dollar exposure for at least 30 days, by the beginning of last week, this was down to three days. If it was bad for industrials, it was becoming impossible for banks. US Dollar holders were not prepared to provide funds to several major Euro-zone banks at virtually any price. They were simply unable t...

The failure of the German Bund auction yesterday is being written off as being of relatively minor significance. It is not- it is critical. If the Federal German government is unable to attract bids for nearly half of the Bunds that they offer, it tells you that the rest of the credit market is also closed. Banks are unable to access even the interbank market, and we are seeing the system come under renewed strain. Already we have seen the collapse of the Lithuanian bank, Bankas Snoras, which has also been dismissed as being of little significance. However, the fact is that there is now a serious liquidity drought across central and eastern Europe, and this is spreading. There are strong rumours of a major liquidity crisis in the Russian banking system- and again the failure and subsequent recapitalization of Bank of Moscow is being dismissed as being of minor significance, simply the result of the political fall of Yuri Luzhkov. In fact it may well be that the fall of Luzhkov was th...

A major characteristic of the Great Recession is the way that chronic and long-term problems finally lead to an acute crisis. The public sector profligacy in Greece or the high debt position of Italy are the consequence of decades of policy mismanagement. The US deficit is the result of long term political deadlock, while in the UK and Ireland the roots of the crisis lie in an obsession with property, rather than production, as the key to wealth. Policy mistakes, misallocation of capital, unfunded pensions, poor productivity have been festering for decades. It is only now that the pressure that these put on economies finally leads to crisis. We have, up until now, mainly seen the crisis hit the Western world. The United States still faces a political struggle to control its deficit as the parties refuse to compromise and, as with much else in the political discourse of the USA enters instead into an arid discussion on matters of the constitution. Yet Business America has coped better...

The economic crisis that began in 2007, became a banking crisis in 2008, a sovereign debt crisis in 2009, a Euro crisis in 2010 has now become a political crisis in 2011. All of the deficit countries in the Eurozone, the so-called PIIGS: Portugal, Ireland, Italy, Greece and Spain have now seen their governments replaced (in Spain, that will actually take place after the election this weekend, though the result is not in doubt). Germany seems to have won the argument that harsh economic discipline is the only solution to the protracted restructuring that seems to be required. The stereotypes that have been flying around: that Greek dishonesty or Italian indiscipline are the root of the crisis may appeal to a certain kind of headline writer, but in fact the crisis has been caused as least as much by German indiscipline and banking incompetence. Of course Chancellor Merkel has much to gain by being portrayed as an inflexible, "iron" Chancellor, but the reality is that unless ...

The decision by the Greek Prime Minister, George Papandreou, to submit the Greek austerity measures to referendum could be seen as a reassertion of democratic control over the relationship between Greece and the rest of the Eurozone. In a way it is a laudable expression of the democratic rights of the Hellenic Republic. In practice, the two or three months of uncertainty that will result, before any referendum can take place, look like being a Greek revenge upon the rest of the Eurozone. The fact is that the markets will most likely deliver a verdict long before the Greek people are able to. It is an astonishingly high stakes gamble for the Greek government, and it is a gamble that could drag other countries beyond the point of no return, and they too fight to restore liquidity and in some cases, solvency. It may well be that Mr. Papandreou can win a referendum, but he may also face the collapse of his PSOK party, as certain defections today seem to hint. The breakdown of the Gr...