Wednesday, May 16, 2012

Greece, Europe, the Dalai Lama & the China crisis

There was an air of gloom hanging over European markets this morning as Greece seemed to be heading towards financial collapse. The mood was little better in Germany. Angela Merkel, who has fought to avert a financial catastrophe in Europe with former French president Nicolas Sarkozy, faced a new challenge with her new team player, François Hollande. Meanwhile a frosty relationship was developing between Britain and China after the prime minister met the Dalai Lama. The Tibetan Buddhist also aired his concern over the financial crisis, and offered some spiritual advice on the matter, saying that money and power had failed to bring "inner peace."

Greek instability

There was certainly no peace in Greece. Nine days after Greek elections a viable coalition government has still not been formed and new elections are likely to be held in June. There were indications that the instability is having far wider effects. There are signs that a run on the banks has begun and that the situation could worsen should Greece, as some have predicted, withdraw from the euro.

Karolos Papoulias, the Greek president, warned party leaders that their continued failure to agree was risking "fatal consequences". Citing a secret government document, he said Greeks were already pulling €100 million a day out of the country's banks, totalling some €1 billion (£795 million / $1.2 billion) since the last elections on 6th May.

Euro exit?

While some economists have suggested a euro exit could be accomplished in an orderly way by closing Greek banks while the country prepares to reissue the drachma. Costas Simitis, a former prime minister, said that would spark panic, warning that Greeks would rush to withdraw money from banks. "If they close more than three days there will be a bank run," he said.

A report in Germany's Wirtschaft Woche magazine forecast that a Greek bankruptcy and exit from the euro would cost the governments of the single currency's 17 members £240 billion, pushing the eurozone and European economy into a crisis not seen since the 1930s [Telegraph].

"Grave mistake"

Writing for Bloomberg Clive Crook says withdrawal would be a bad move. Exasperated European Union officials have begun openly discussing the country's exit from the euro currency system, Crook observes, but insists this would be a "grave mistake".

Greece's exit would be no less catastrophic than when the EU called it unthinkable, and not just for Greece, Crook argues. It is a feeling expressed in many circles. "Divorce is never smooth," Luc Coene, the governor of Belgium's central bank and a member of the European Central Bank's governing council, told the Financial Times on 13th May. "I guess an amicable divorce, if that was ever needed, would be possible but I would still regret it."

In such a divorce there would still be the alimony, and in the case of Greece the debts accrued would make a divorce from Europe very painful and costly. Economist Barry Eichengreen, seen as a leading authority on such matters, has argued it would provoke "the mother of all financial crises."

Stocks tank

The collapse of political talks intended to create consensus and agreement has already sent shockwaves through financial markets on Monday which rippled into Tuesday, with only a slight recovery seen as some traders attempted to make good on losses by buying up cheaper stocks.

The euro hit a fresh four-month low against the dollar on Tuesday dropping to $1.27 and slipping slightly against the pound which was worth only 79.6 pence [BBC]. On Wednesday the news was little better with markets around the globe reeling from the euro-crisis. All major indices were affected with the Hang Seng seeing a decline of some 3%. China's stocks fell for a fourth day on speculation the nation's economic slowdown may deepen and as Greece's failure to form a new government increased concern the country will leave the euro [Bloomberg].

Uncomfortable allies

With the radical left in the lead, according to the most recent polls, the Greek economic future is extremely uncertain. Germany's finance minister, Wolfgang Schäuble, has already warned that Greece would have to stick to its hardline austerity programme in order to continue to receive the bailout cash needed to pay government salaries and support troubled banks. Yet the far-left anti-austerity party Syriza are looking to abandon the agreements fleshed out by Germany's Angela Merkel and former French president Nicolas Sarkozy.

And there lies another problem. What had once been a cozy and unified approach to the solving of Europe's economic crisis, is now complicated by an uncomfortable relationship between Germany and its neighbour and its new socialist leader.

Storm clouds

François Hollande was sworn in as the new French president on Tuesday, but soon after the ceremony the heavens opened dampening the mood in Paris and was seen by some as a bad omen for the the administration.

As Hollande flew to Germany to meet with Angela Merkel his plane was struck by lightning and forced to turn back to Paris [BBC]. French officials said no one was hurt, but that the plane had returned to Paris as a precaution.

Forced earlier to change his drenched suit after being caught in rain of biblical proportions, the newly-inaugurated French President boarded a second flight and arrived in Berlin some 90 minutes late.

Growth or austerity

But while smiles and a red carpet greeted the French president, the mood soured after Hollande questioned Angela Merkel's approach to solving the economic crisis.

Both leaders said they wanted to keep debt-stricken Greece in the euro, but there were differences of opinion over how the crisis might be resolved. "Everything must be put on the table by everyone" that could promote growth, Hollande said. And it was his emphasis on growth that may prove to be a stumbling block.

German Chancellor Angela Merkel has continually promoted the principle of austerity, for governments not to spend beyond their means, and a need for public finances to be sorted out. Hollande meanwhile is seen as a politician who sides with the theory that countries can spend their way out of recession.

An informal summit has been arranged for 23rd May, but if a compromise cannot be met Europe may enter a perilous new phase of financial problems [BBC].

Britain's position

Across the English channel the Europe's financial issues are still a cause for concern despite the fact that Britain has not entered the euro. Deputy Prime Minister Nick Clegg warned that uncertainty was "particularly damaging" to struggling economies across Europe including Britain, and he urged  leaders to negotiate a solution "as soon as possible".

Meanwhile Chancellor George Osborne flew into Brussels to discuss the crisis with other countries which have not adopted the European currency. Part of the discussions hinged around rules over banking, and the Chancellor was seen to have scored a victory over his European rivals by securing the right to impose stricter financial regulation on Britain's banks [Telegraph].

Rift with China

Such concessions might be only a small victory if Britain loses business deals which some feared might result from a diplomatic crisis that was brewing over a visit to Britain by the Dalai Lama.

David Cameron's efforts to court Chinese business appeared to have backfired yesterday, as Beijing accused the Prime Minister of "hurting its feelings" and "damaging relations" by meeting the spiritual leader.

Deputy Foreign Minister Song Tao summoned British Ambassador to China, Sebastian Wood, to give him a dressing down after Cameron and Clegg met the Dalai Lama at St Paul's Cathedral in London.

"Damaged relations"

Ministry of Foreign Affairs spokesman Hong Lei said the meeting had "seriously damaged the relations between China and the UK" and called on Britain "to respond to China's solemn demand and stop conniving and supporting Tibetan separatists." [Xinhua]

In a stern response from China's Deputy Foreign Minister, Song Tao said the meeting had "impaired China's core interest" and put bilateral relations at risk. "It has impaired China's core interest and hurt the feeling of the Chinese people There must be concrete actions on the British side to create enabling conditions for the sound development of bilateral relations," Song said in a statement published by China Daily.

It is not clear if business deals would be affected following the meeting, though Downing Street attempted to downplay the affair. "The Dalai Lama is an important religious figure," spokesman Steve Field told reporters. "We do not want to see our relationship with China disrupted by the visit of the Dalai Lama. The Dalai Lama travels all over the world and has visited the U.K. several times in the past," holding meetings with Cameron's predecessors, Gordon Brown and Tony Blair." [Bloomberg / Telegraph / Guardian / Daily Mail]

"Money, money, money"

The Tibetan spiritual leader had arrived in London to receive the annual Templeton Prize awarded for exceptional contributions to "affirming life's spiritual dimension". In accepting the award the Dalai Lama said he would donate £900,000 to Save the Children in India, with £125,000 set aside for The Minds and Life Institute, a body dedicated to creating a working collaboration and research partnership between modern science and Buddhism.

During his visit he expressed his dismay at the riots which swept across parts of Britain last year. It was vital to find the reasons for the "frustration and anger" behind the outburst of violence in English cities, the Dalai Lama said.

He accused governments and the media alike of "brainwashing" children with "money, money, money" ideas. In response to the economic hardship that many people are experiencing, the spiritual leader said people should put their faith in "optimism and hard work" rather than blaming others.

The economic crisis had been created by man, not God, and every effort was needed to tackle the crisis, he said. "We must make every effort to work on these things," the Dalai Lama said. "We need self confidence, please do not feel helpless or hopeless." [BBC]

Stormy weather

Speaking on Wednesday morning Bank of England's Mervyn King delivered his forecast concerning Britain's economy saying the Eurozone posed the greatest risk. "We don't know when the clouds will move away," King told reporters. However he was optimistic saying that "the stormy weather would move away" and there would be "a steady recovery" with Britain's economy eventually reaching "calmer waters".

While output had slowed, and become almost stagnant, there was no reason why it could not return to previous levels. However, King said it might take "ten, fifteen, even twenty years to get there".

In his quarterly inflation report King said that inflation would likely remain above the government's 2% target. Addressing the crisis in Europe King said that Britain should not be complacent because it had not adopted the single currency. "The fact that we're not in the euro does not mean we're not going to be affected," King told reporters. The crisis had created creditors and debtors and these groups needed to be dealt with. "These are not liquidity problems, they are solvency problems," King iterated, "and the credit losses will need to be recognised."

"Get a grip"

While mainly confining his assessment to Britain's economy, King observed that growth had slowed around the globe. And he pressed on his colleagues in Europe to "get a grip on it".

For Britain's part "we need to stave growth with low inflation," King said. But having put forward his proposals he added that it was now up to the government to do the right thing. "I will do no more shouting. Others will now have to respond."

China crisis

There was little if any mention to China, but the euro crisis is having a sharp effect, not only in the markets but also in manufacturing output. China's economy has cooled abruptly and there has been a wave of bankruptcies. 

"I can see about one-fifth to one-third of the factories are about to close, and owners are preparing to sell off their equipment," said Gao, general manager of Taiyuan Fanhe Engineering Co. [Economic Times]. China's economic growth has decelerated as export demand and consumer spending at home weaken, raising the threat of job losses and possible unrest. Just as leaders in democratic countries have been under pressure in the wake of the economic turmoil seen across Europe and the the Americas, China's new leadership, which is set to take the reins later this year, will face difficulties in calming dissent if unemployment grows significantly.

The rhetoric issued by Beijing with suggestions that business might suffer because of meetings with the Dalai Lama are unlikely to manifest themselves with action. "We're all in this together," George Osborne said earlier this year, as he put forward proposals to cut Britain's deficit. However the ongoing economic crisis is solved, and however long it takes to turn the ship around, it is clear that the whole world is in the same boat.

tvnewswatch, London, UK

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