Why Greece won’t trigger a global crisis

(By Deutsche Welle) Limited private sector exposure and massive public sector intervention means little risk of financial contagion spreading from Greece. But there is one area of uncertainty: European politics, says DW’s Spencer Kimball.

Financial contagion is normally preceded by a surprise.

Take the 2008 Wall Street meltdown as an example. The US housing market had experienced a boom. Seeking to profit from the bonanza, private financial institutions the world over purchased securities issued by the mortgage lenders Fannie Mae and Freddie Mac.

Fannie and Freddie are government-sponsored enterprises. As a consequence, investors implicitly assumed that securities issued by the two mortgage lenders were backed by Uncle Sam. But their assumption was wrong, at least initially.

Fannie and Freddie’s securities did not have the same backing as US Treasury bills and when the boom went bust, financial institutions were exposed to more risk than they had anticipated. As the crisis spread through the US and global financial systems, the federal government was ultimately forced to intervene and bail out Fannie and Freddie.

“Financial institutions had wildly underestimated the riskiness of these assets, which made for really fast and furious contagion,” Carmen Reinhart, an economist who researches financial contagion at Harvard’s Kennedy School of Government, told DW.

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View from the US: Greece is no Lehman Brothers

(By Deutsche Welle) US markets will likely face little long-term fallout if Greece defaults on its debt. Policymakers in Washington are more concerned about the security implications of Greece exiting the eurozone. Spencer Kimball reports.

US President Barack Obama has been making phone calls. In conversations with his French and German counterparts, the president emphasized the importance of keeping Greece in the eurozone.

By most accounts, the US will not face a serious economic blow back if Greece defaults on its debt obligations this week, though the Dow Jones Industrial did drop by two percent on Monday, its biggest decline in two years.

US-based fund managers like Axel Merk actually believe that a default could serve as a healthy wake-up call to complacent investors, who’ve been shielded from risk by the intervention of central banks in financial markets over the years.

“This does not mean that if Greece defaults it’s like Lehman brothers in 2008, where there was potential threat of a meltdown of the financial system,” Merk, president of San Francisco-based Merk Investments told DW. “We’re in a very different situation from 2008 or even 2012 in the eurozone.”

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US faces post-election leadership vacuum in EU

(By Deutsche Welle) As the dust settles from the EU elections, member states are bartering over who should lead the supranational bloc’s executive body. There’s concern in the US that division in Brussels could create a leadership vacuum.

Long before last month’s EU parliamentary elections, the bloc’s 28 member states had agreed that they would take the outcome of the popular vote into consideration when nominating the next European Commission president.

But the candidate from the leading European People’s Party, Jean-Claude Juncker, has proven divisive among the EU’s national leaders. British Prime Minister David Cameron has reportedly warned his continental counterparts that Juncker, a committed European federalist, would undermine already waning public support for EU membership in the euro-skeptic UK. Finland, France, Hungary, the Netherlands and Sweden have also reportedly expressed reservations about Juncker.

“The US very clearly favors the UK obvously remaining within the European Union and being a productive member,” Erik Brattberg, an analyst with the Atlantic Council, told DW.

“It views a strong European Union as a better partner to deal with, both bilateraly but also in terms of the European Union’s ability to have a strong and united foreign policy,” he said. “Anything that pushes the UK away from the European Union, from a Washington perspective, would be a bad thing.”

At the earliest, the member states will nominate and the European Parliament will confirm the next commission president by the end of July. But given the EU’s internal divisions over Juncker, the process of political horse-trading could drag on into the fall, leaving a leadership vacuum in Brussels for much of the rest of the year.

“[… ]Especially at this pivotal moment in the EU’s relationship with Russia and regarding Ukraine, there’s a risk that this uncertainty will put a hamper on transatlantic relations […],” said Brattberg, who also works with the Center on Transatlantic Relations at John Hopkins University.

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Trade ties expose EU, US rift over Russia sanctions

(By Deutsche Welle) The EU and the US have threatened Russia with punitive measures if Moscow does not reduce tensions in Ukraine. But some European countries are reluctant to impose sanctions due to close trade ties with Russia.

Scrambling to react to the crisis in Crimea, the Obama administration has threatened Russian officials with visa bans and asset freezes, if the Kremlin refuses to roll back its military intervention in the Black Sea peninsula. But the European Union has proven reluctant to follow suit, holding out hope that diplomacy can resolve the Cold War-style crisis on its doorstep.

The White House has already suspended military ties and trade talks with Moscow, while the entire Group of Seven (G7) industrialized nations have agreed to not participate in preparations for their summit in Sochi this June. Meanwhile, EU foreign ministers met in Brussels on Monday, where they strongly condemned “the clear violation of Ukrainian sovereignty and territorial integrity by acts of aggression by the Russian Federation.”

Although the EU threatened to suspend bilateral talks with Moscow on trade and visa liberalization and “consider further targeted measures,” the bloc did not explicitly place the threat of economic sanctions on the table. The EU’s 28 leaders are scheduled to meet for an emergency summit on Thursday, where they will consider whether or not to impose punitive measures.

“It’s clear that everybody would like to see this crisis solved politically without imposing sanctions, because those would severely damage bilateral relations,” Paul Ivan, an expert on EU sanctions with the European Policy Center, told DW.

“Sanctions are the most serious measure you can take before going to war,” he said.

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Merkel’s strength at the polls leaves her searching for a coalition partner

In the wake of arguably Europe’s most important election since the outbreak of the eurozone debt crisis in 2010, German Chancellor Angela Merkel’s decisive showing may ironically prove to be her Achilles heel. Although Merkel’s conservative Christian Democrats (CDU) managed to secure a whopping 41 percent of the vote on Sunday, their victory is in certain respects a hollow one.

The chancellor’s governing partners in the last coalition, the both fiscally conservative and socially liberal Free Democrats, have failed to surpass the all-important five percent hurdle. That means they will not have representation in the upcoming parliament. And Merkel’s Christian Democrats just barely missed securing an absolute majority on their own. Their nearly 8 percent gain compared to the 2009 election result came partially at the expense of the FDP.  So although the Christian Democrats are indisputably the strongest force in German politics, they apparently aren’t strong enough. Germans overwhelmingly confirmed Merkel as chancellor, but effectively voted against her now defunct center-right coalition.

As a consequence, the chancellor will have to seek a coalition partner among one of the opposition center-left parties, with the most likely candidate being the Social Democrats. The CDU and the SPD governed together in a grand coalition from 2005-2009. Other political combinations seem unrealistic. Although Merkel moved to trade nuclear for renewable energy in the wake of Fukushima, she still remains far apart from the Greens on economic and social issues. Likewise when it comes to the socialist Left party, still the pariah of the German political system.

A grand coalition would alter the political landscape in Berlin. The Social Democrats won a respectable 25 percent of the vote and are firmly anchored in a broad base of support. Merkel will not be able to simply twist the SPD’s arm and pull them in her direction, as was the case with the much smaller FDP.

The bottom line: Europe’s political landscape continues its slight tilt leftward. When Greece first asked for a bailout in 2010, Merkel was governing in a secure center-right coalition. She had a conservative ally in neighboring France, Nicolas Sarkozy. Today, Merkel faces the prospect of a coalition with Social Democrats, while a socialist president already resides in the Elysee in Paris. In light of this, the eurozone’s debt-stricken member states may be hoping for a reprieve from biting austerity and more focus on economic stimulus. But they shouldn’t expect drastic change in short order. After all, the SPD – despite its rhetoric – has voted for Merkel’s eurozone policies.

US foreign policy looms over German election

(By Deutsche Welle) In Germany’s election, controversial US policies on surveillance and Syria have forced the candidates to walk a fine line on relations with Washington. But the US wants Berlin to play a bigger global leadership role.

At the G20 summit in St. Petersburg this month, major European nations such as France, Great Britain, Italy and Spain all signed a joint statement supporting the United States’ position on Syria. The document pointed the finger at the Assad regime as the likely culprit behind the alleged August 21 chemical weapons attack in eastern Damascus and called for a “strong international response.”

But the signature of Europe’s largest economy and arguably most important political power, Germany, was noticeably absent from the joint statement.

Berlin hesitated and then ultimately signed the communiqué one day later. It’s an election year, and with the campaign now in its final leg before the vote on September 22, the center-left opposition is trying to breach Chancellor Angela Merkel’s seemingly impregnable position in the polls. Even foreign policy, often a back-burner issue in elections, has become a point of campaign contention.

The issue of military strikes against Syria is not the first time that US policy has stirred up partisan recriminations in Germany’s election campaign. Reporting by newsmagazine Der Spiegel on former NSA contractor Edward Snowden’s leaks about US surveillance programs, and Berlin’s alleged involvement in them, has dogged Merkel for months now.

“It’s a fine line – the candidates can’t get too close to the US, especially on the NSA issue,” Stephen Szabo, executive director of the Transatlantic Academy, told DW. “On the other hand they can’t be seen as being too distant either, because the US is still one of German’s biggest economic partners. It’s still its major security partner.”

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EU fines Microsoft for antitrust breach

(By Deutsche Welle) In a historic antitrust case, the EU has levied a penalty of more than half a billion euros against American software giant Microsoft. The ruling could serve as both a precedent and deterrent in future antitrust cases.

The European Commission on Wednesday fined Microsoft 561 million euros ($731 million) for failing to uphold an antitrust settlement, marking the first time that Brussels has punished a company for not living up to its legally binding settlement commitments.

“Legally binding commitments reached in antitrust decisions play a very important role in our enforcement policy because they allow for rapid solutions to competition problems,” EU Competition Commissioner Joaquin Almunia said in a release on Wednesday.

“Such decisions require strict compliance,” Almunia added. “A failure to comply is a very serious infringement that must be sanctioned accordingly.”

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