politically driven effort to place obstacles in the way of an industry that is almost exclusively based in the US and the UK

TO BE NOTED: From the FT:

"Europe’s classic exercise in closet protectionism

By Paul Marshall

Published: May 17 2009 19:19 | Last updated: May 17 2009 19:19

If opponents of the European Union are looking for evidence of political meddling and overreach, they could hardly find a better example than the new draft directive on alternative investment fund management. The proposal, aimed at imposing new regulation on hedge funds and private equity, is a politically driven effort to place obstacles in the way of an industry that is almost exclusively based in the US and the UK. It makes a mockery of any notion of subsidiarity – taking decisions at the lowest possible level – and is a classic exercise in closet protectionism.

I say this as a committed European and a member of the advisory council of Business for a New Europe (BNE), which strongly supports the UK’s active engagement in Europe. Indeed, BNE was set up to promote a reformed, enlarged and free-market EU.

The trouble with the draft directive is that it promotes no such thing. Instead, it proposes lifting authority for the initial authorisation, monitoring and supervision of alternative investment fund managers, as well as powers over the provision of services and marketing of funds, from the competent national authorities to the European Commission. The Commission may continue to delegate some of these powers to the countries, such as authorisation of managers. But the damage is done. The directive transfers ultimate powers to Brussels at the expense of national regulators.

It also has a strong protectionist element, since it would prevent fund managers in third countries – such as the US – from accessing the European market unless those countries adopted “equivalent” regulation. Try this as a sample of the language: “The key functions and activities which are likely to give rise to risks for European markets, investors or counterparties are required to be undertaken by EU-established entities, operating subject to harmonised rules.”

The content of the draft directive is a surprise to all those who have closely followed recent regulatory developments. Although hedge fund managers in the UK have always been regulated just like any other fund managers, the industry recognises that it needs to demonstrate to the outside world that it acts responsibly. That is why some of the leading funds, including Marshall Wace, joined together recently to promote tough voluntary standards – an approach endorsed by the recent gathering of leaders of the Group of 20 nations in London. The Commission’s draft legislation completely ignores the approach the G20 backed.

The Commission has also ignored in-depth analysis carried out by distinguished experts into the causes of the financial crisis and the measures needed to ensure it does not happen again. The De Larosière report carried out for the European Commission and the Turner report for the UK government both produced level-headed analyses of the failings of the global financial system. But neither could have led anyone to believe that the alternative investment industry was a dangerous source of risk, let alone the cause of the financial crisis.

Despite all this, the European Commission has steamed ahead without proper input from those most affected by its proposed measures – the investors and fund managers. It has also based its recommendations on an assessment of the risks posed by alternative investments that is at best debatable and at worst reveals a strong prejudice against this industry.

At a time when the overall reputation of the financial sector is so poor, it is hardly surprising that many people do not have a great deal of sympathy for the alternative investment industry. Most people do not really understand it or believe in its ability to create value for society as a whole, and I accept that it is up to us to explain ourselves better. But everyone can see what a misguided political project can lead to. This draft has been rushed through under extreme political pressure in a key electoral period, ahead of votes for the European parliament and in Germany. Is the EU really going to be built on such unashamedly protectionist initiatives, which marginalise the countries most affected?

Admittedly this is only the beginning of a long process. The final directive will have to be debated and approved. There will be the opportunity to modify it substantially and I hope the British government will take a lead in this. But the present draft is a very bad start. All it does is enhance the suspicions held by some in the UK that it is highly risky to engage with the continental Europeans on matters of crucial British interest.

The writer is chairman of Marshall Wace"

Estonia’s economy might decline by more than 15% in 2009

TO BE NOTED: From A Fistful Of Euros:

"Estonian GDP Shrinks By An Annual 15.6% In The First Three Months Of 2009 by Edward Hugh

Well, the best thing that can be said about this is that it wasn’t as bad as the 18% contraction recorded in Latvia.

Estonia’s economy contracted the most in at least 15 years in the first quarter, making it the second-worst performance in the European Union. Behind the number lay a sharp fall in consumer spending and a plunge in industrial output. GDP was down by an annual 15.6 percent, the sharpest drop since at least the first quarter of 1994, according to the flash estimate from the statistics office. The fall follows a 9.7 percent drop in the last three months of last year.

The 15.6% year on year was significantly above the consensus forecast for a drop of 12.8 % and even above more “realistic” forecasts like the Danskebank 14.6% guesstimate, and will obviously have implications for all sorts of things, but in particular for the government budget deficit forecast.

The latest round of GDP numbers from all three Baltic states - Lithuanian contracted by 12.6% and Latvian by 18% - all indicate extreme weakness in the respective economies.

Today’s number obviously lends support to the idea that Estonia’s economy might decline by more than 15% in 2009. A lot depends on what the next quarter looks like. If the slowdown accelerates the final annual number might be even worse.

According to the statistics office release, output was broadly down for the majority of economic activities, but the steepest decreases were in manufacturing, construction and the retail trade. Weak external demand added to lack of internal price competitiveness meant exports were a further drag on manufacturing performance. Industrial output fell by more 25% year on year in each of the first three months and retail sales have now been falling for 11 consecutive months. Exports plunged 29 percent in January and 25 percent in February.

The weakness of the GDP number means the budget situation will inevitably have deteriorated further, which means that if the deficit target of 3% of GDP is to be maintained the Estonian government will need to respond with even more painful cuts in spending. In general, the performance does not change the outlook for Estonia to fulfil the Maastricht criteria this year, but it does mean that sticking to the criteria is getting to be a harder task with every passing day."

Their anti-crisis strategy is to hope the US and China deliver sufficient growth to pull Europe out of recession

TO BE NOTED: From the FT:

"Like a fish, Europe is rotting from the head

By Wolfgang Münchau

Published: May 10 2009 18:58 | Last updated: May 10 2009 18:58

Helmut Schmidt, the former German chancellor, last month made an astute observation: “The European Central Bank is the only institution in Europe that works well.”

It is a remarkable statement in several ways. It implies of course that the other European institutions are not working well. I am afraid this is true. I have on previous occasions criticised the unco-ordinated policy response of Europe’s political leaders. Their anti-crisis strategy is to hope the US and China deliver sufficient growth to pull Europe out of recession. That will probably not happen this time.

But there is another, less frequently discussed dimension to Europe’s mistaken policy response. The European Commission, the executive arm of the European Union whose job is to implement the region’s law and to drive its policy agenda, has failed abysmally in this crisis. The Commission was largely absent during the worst months of last year, and its subsequent responses fell consistently below what one would expect.

Of course, the Commission is not a government. It has only a small budget, no powers to raise taxes or issue bonds, and it operates under strict guidelines. But as various dimensions of economic policy are now integrated across Europe, one would expect the Commission to play a leading role as a co-ordinator and as a source of new ideas to fight the crisis.

The problem with the Commission is not its civil servants. In the absence of political leadership, they apply the rules as they are, for example when they recommend brutal and politically suicidal wage cuts in Latvia, when they apply accession criteria to the eurozone with no flexibility, or when they produce ineffective financial regulation. These are not causes of the problem but mere symptoms of a lack of political direction.

There is a saying that the fish rots from the head, and this is exactly what has been happening here. There is nothing in European politics that stinks more than the apparent inevitability of another five-year term for José Manuel Barroso, the Portuguese president of the Commission. He spent most of the last few years on his bid for re-election rather than doing his job. If the centre-right wins the elections to the European parliament, as everybody seems to expect, nothing can stop Mr Barroso’s bandwagon.

This state of affairs sends out a disastrous message – that job performance is irrelevant and that Europe has already reverted to business as usual. Mr Barroso is a conservative from a small country, who followed a socialist from a large country. Europe’s top jobs are not awarded on the basis of electoral success, but on whether you fit into an opaque political matrix.

In the case of a Commission president who has already served for five years, one would expect that he should at the very least be able to answer the questions: What exactly did you achieve during your first term? And what is your big idea for the second?

In my view, Mr Barroso is among the weakest Commission presidents ever, a vain man who lacks political courage. He and his supporters will tell us that his big achievement is his dogged pursuit of the Lisbon agenda, a programme to boost Europe’s international competitiveness. Another supporter of Mr Barroso told me that his biggest legacy was the decision to set up the De Larosière committee, named after a former central banker whose group produced a moderately ambitious report to reform Europe’s system of banking supervision. Okay, let us give him some credit for that.

I suspect his big idea for the next five years is to relaunch the Lisbon agenda, and waste another five or 10 years on voodoo economics, and diverting attention from real and urgent policy issues, such as a more coherent system of economic crisis management.

Everybody in Brussels is saying that Mr Barroso’s reappointment is almost a done deal. I suspect they are right. Ms Merkel apparently finds him a congenial and pliable Commission president, and the Socialists are too incompetent to field their own candidate. Gordon Brown, the British prime minister, is also supportive. Nicolas Sarkozy is not a fan, but then the French president is not a supporter of a strong and self-confident European Commission either, so Mr Barroso might suit him well for that reason. Silvio Berlusconi, the Italian prime minister, has other problems at the moment.

There are still a few potential obstacles to Mr Barroso’s re-election. The European elections might not go as well for the Christian Democrats as they hoped, and the centre-right might end up too fragmented. It is possible that the outcome of the second Irish referendum on the Lisbon treaty will have a bearing on the decision, which is why Mr Barroso wants EU heads of government to decide on his reappointment at their meeting next month, rather than in October, as Mr Sarkozy recently proposed.

So it is not quite game, set and match yet, but it is as close as it could get at this stage. This is all very depressing. Mr Schmidt is right about the ECB. Indeed the central bank made a number of good decisions last week, when it delivered a robust policy response to the crisis.

But I never thought that we would ever celebrate a central bank as the only political institution that really works in Europe. How did we get there?

munchau@eurointelligence.com"

Eurostat inflation data might concentrate minds, showing annual Eurozone inflation of 0.6% and several countries already in deflation

TO BE NOTED: From A Fistful Of Euros:

"The European Union

The ECB schism

by P O Neill

You might think that enough has already been written about dealing with deflation and unconventional monetary policy tools. But apparently not enough to settle the question of whether the European Central Bank should in fact further cut interest rates and shift to quantitative easing i.e. outright purchases of debt. This Bloomberg story puts names on who is arguing for what, with an extended Hellenic phalanx (George Provopoulos, Athanasios Orphanides and Lucas Papademos) pushing for quantitative easing but the Bundesbank’s Axel Weber arguing that the ECB is already near its limits on any type of loosening.

The latest Eurostat inflation data might concentrate minds, showing annual Eurozone inflation of 0.6% and several countries already in deflation. But if the cautious EU countries thought that the G20 enhancements to the IMF would bail out them out any further anti-crisis measures, that money to eastern Europe needs to start flowing soon. Note: the only big announcement since the G20 is the facility for Poland, and that’s a precautionary facility. The ECB can’t dodge this issue forever."

documents serious human rights violations by the Eritrean government, including arbitrary arrest, torture, appalling detention conditions...

TO BE NOTED: From ReliefWeb:

"Eritrea: Repression creating human rights crisis

Source: Human Rights Watch (HRW)

Date: 16 Apr 2009

Host Countries Should Cease Forced Returns of Eritrean Refugees

(London, April 16, 2009) – Eritrea's extensive detention and torture of its citizens and its policy of prolonged military conscription are creating a human rights crisis and prompting increasing numbers of Eritreans to flee the country, Human Rights Watch said in a report released today.

The 95-page report, "Service for Life: State Repression and Indefinite Conscription in Eritrea," documents serious human rights violations by the Eritrean government, including arbitrary arrest, torture, appalling detention conditions, forced labor, and severe restrictions on freedom of movement, expression, and worship. It also analyzes the difficult situation faced by Eritreans who succeed in escaping to other countries such as Libya, Sudan, Egypt, and Italy.

"Eritrea's government is turning the country into a giant prison," said Georgette Gagnon, Africa director at Human Rights Watch. "Eritrea should immediately account for hundreds of 'disappeared' prisoners and open its jails to independent scrutiny."

Human Rights Watch called on the United States and European Union to coordinate with the UN and the African Union to resolve regional tensions and ensure that development aid to Eritrea is linked to progress on human rights.

The EU recently approved a €122 million assistance package to Eritrea despite concerns that development projects in Eritrea are carried out by conscript or prison labor in violation of international law.

Based on more than 50 interviews with Eritrean victims and eyewitnesses of abuses in three countries, the report describes how the Eritrean government uses a vast apparatus of official and secret detention facilities to incarcerate thousands of Eritreans without charge or trial. Many of the prisoners are detained for their political or religious beliefs, others because they tried to evade the indefinite national service or flee the country.

Torture, cruel and degrading treatment and forced labor are routine for conscripts as well as detainees. Detention conditions are appalling, with detainees typically held in overcrowded cells – sometimes underground – or in shipping containers that reach searing temperatures by day and are freezing at night.

Those who try to flee risk severe punishments and the possibility of being shot while crossing the border. The government also punishes the families of those who escape or desert from national service with exorbitant fines or imprisonment. Despite these severe measures, thousands of Eritreans are trying to escape their country.

Most refugees first flee to neighboring Ethiopia and Sudan, and then travel to Libya, Egypt, and Europe. Hundreds of Eritreans have been forcibly repatriated from Libya, Egypt and Malta in the past few years and have faced detention and torture upon their return.

Because of the risk of mistreatment faced by those who are returned, the United Nations High Commissioner for Refugees has advised against deporting anyone to Eritrea, including rejected asylum seekers. Human Rights Watch called on all countries hosting Eritrean asylum seekers not to forcibly return them, given the risk of torture.

"Countries receiving Eritrean refugees need to make sure that they get the protection and assistance they need," said Gagnon. "Under no circumstances should Eritreans be returned to Eritrea, where they face almost certain detention and torture simply for having fled."

Eritreans celebrated when the country gained its independence from Ethiopia in 1993 after a bloody 30-year war. But the government of President Isayas Afewerki, who led Eritrea through much of its extraordinary struggle for independence, has steadily restricted democratic freedoms, particularly since a 2001 crackdown on political opposition and media.

Eritrea claims its prolonged mass mobilization is justified by security concerns stemming from a two-year border conflict with Ethiopia that cost tens of thousands of lives from 1998 to 2000. The government often blames the United States, the United Nations, and African states for the current political impasse, contending that they have failed to pressure Ethiopia to implement the border demarcation decision of an independent UN commission, which awarded a disputed area to Eritrea.

Eritrea has had tense relations or military clashes with all of its neighbors at one point or another, and the political stalemate between Eritrea and Ethiopia has contributed to regional instability. Each government has supported armed opposition groups against the other, and Eritrea's support for militant Islamist groups in Somalia has exacerbated the conflict in that country.

"Eritrea's human rights crisis is worsening and making the Horn of Africa ever more volatile," said Gagnon. "The US, European, and other governments need to coordinate their policies on the Horn to defuse regional tensions, and make human rights progress an essential benchmark for engagement with Eritrea."

Selected accounts from Eritrean refugees:

"I sacrificed my life for the prosperity, development and freedom of my country but the reverse is true… we did not spend 65,000 martyrs for this!"

– An elderly man who fought for the Eritrean People's Liberation Front (EPLF) in the liberation struggle

"It's okay to do national service, it's fair to serve one's country but not always. It's not fair when it's indefinite."

– A young man who recently fled national service

"If someone is suspected of escaping then they are tied up – just hands or hands and feet, or ferro [with iron handcuffs]. ... Individuals decide what kind of punishment is given, there's no law. They do not have any crimes but [people are punished because] they hate the military or hate to be a soldier. That is the main reason. Because everyone in Eritrea hates to be in the army."

– A former army officer who explained how those suspected of trying to escape from the army were tortured

"First you do your military training then they hold you forever without your rights. The military leaders can ask you for anything and if you refuse their demands then you can be punished. Almost every woman in the military experiences this kind of problem."

– A female recruit who served as a conscript for 10 years and suffered repeated sexual harassment

"In Dahlak there is no time limit, you are waiting for two things: either someone is coming to transfer you or to kill you. When I left Dahlak I was 44 kilograms. My haemoglobin was nothing. I needed a stick to walk. We were living underground, the temperature was 44nC; it was unbelievable. There is no word to express the inhumanity."

– A former political prisoner detained on Dahlak Island in the Red Sea

"If one of the men escapes, you have to go to his home and find him. If you don't find him you have to capture his family and take them to prison. Since 1998, it's standard to collect a family member if someone flees. The administration gives the order to take family members if the national service member is not around. If you disappear inside Eritrea then the family is put in prison for some time and often then the child will return. If you cross the border, then [your family] pays 50,000 nakfa [US$3,300]. If there's no money then it can be a long time in prison. I know people who are in prison for six months."

– An officer formerly responsible for rounding up national service deserters

For more Human Rights Watch reporting on Eritrea, please visit:

http://www.hrw.org/en/africa/eritrea

© Copyright, Human Rights Watch 350 Fifth Avenue, 34th Floor New York, NY 10118-3299 USA"

«

But rather than resorting to layoffs, Mr. Koppe asked half his employees to come in every other week.

TO BE NOTED: From the NY Times:

"Europe, Aided by Safety Nets, Resists U.S. Stimulus Push

By NICHOLAS KULISH

VIENENBURG, Germany — Last month Frank Koppe gathered together all 50 of his employees at Koppe-Apparatebau for coffee, cake and the kind of bad news that has lately become all too familiar. He told them the small company’s business, designing and manufacturing custom equipment for industrial plants, had been sliced nearly in half.

But rather than resorting to layoffs, Mr. Koppe asked half his employees to come in every other week. The government would make up roughly two-thirds of their lost wages out of a fund filled in good times through payroll deductions and company contributions.

The program — known as “Kurzarbeit,” which translates as “short work” — and others like it lie at the heart of a heated debate that has erupted on the eve of next week’s Group of 20 meeting of industrialized and developing nations and the European Union, creating a rift between the Obama administration and European governments. The United States is pressing for a coordinated package of stimulus plans by member countries to encourage economic growth, something that Prime Minister Mirek Topolanek of the Czech Republic, which holds the European Union presidency, has called “a way to hell.”

But virtually all European governments, led by budget-conscious Germany, are resisting the American pitch, saying the focus should be on stricter regulation of financial markets.

The Europeans say they have no need for further stimulus right now because their social safety nets, derided in good times by free market disciples as sclerotic impediments to growth, are automatically providing the spending programs that the United States Congress has to legislate.

Europe’s extensive job protections and unemployment benefits are “bad in the upswing, because firms don’t dare to hire people, because then they are glued to them,” said Hans-Werner Sinn, president of the Ifo Institute for Economic Research in Munich. “In the downswing, it’s good if the people are glued to the companies. They keep their jobs. They keep their income. They keep consuming.”

The German Federal Labor Office projects that it will spend some $2.85 billion this year for more than a quarter of a million people who end up on Kurzarbeit. In comparison, the agency doled out around $270 million last year, as the financial crisis first began to bite, and roughly $135 million in both 2006 and 2007.

That is a relatively small amount of money compared with the $787 billion stimulus package passed by Congress, but the Kurzarbeit program’s defenders in the German government say it is carefully calibrated to keep people on the payrolls, where shared burdens mean an efficient deployment of resources.

The big numbers at the top of stimulus bills — promises of future highways, for instance — are not the same as money going into consumers’ pockets right now, and from there into cash registers, economists here say.

“While the magnitude of stimulus has been much less in Europe’s case, the stimulus has been getting much better traction in Europe than in the U.S. so far,” said Julian Callow, chief Europe economist at Barclays Capital in London. He cited a German incentive program that gave consumers around $3,400 to trade in old cars for new ones and that had led to 22 percent more auto registrations in February compared with the previous year.

“Europe can still do significantly more and needs to do it, but the needs for the U.S. have been much more pressing,” Mr. Callow said.

Germany already has generous unemployment benefits compared with the United States. And many German companies give workers the flexibility to save overtime hours, carrying over the pay for a rainy day. In the United States, despite scattered reports of unpaid furloughs and wage cuts, companies still rely heavily on layoffs to control labor costs.

As of July 1, Germany’s roughly 20 million pensioners are receiving an additional 2.4 percent in the former West Germany and 3.4 percent in the former East, the highest increases since 1994 and 1997, respectively.

Germany’s chancellor, Angela Merkel, believes the Americans have underestimated the economic impact of the country’s two stimulus packages, worth a total of about $110 billion. Indeed, in terms of immediate stimulus, according to calculations by the International Monetary Fund last month, Germany has committed to stimulus spending this year equal to 1.5 percent of the country’s gross domestic product, compared with 0.7 percent in France and 2 percent in the United States. According to a report from Bruegel, a research center in Brussels, while Germany churns out 19 percent of the European Union’s economic activity, it accounts for 37 percent of the group’s stimulus spending.

American critics, like Adam S. Posen, the deputy director of the Peterson Institute for International Economics in Washington, say that Germany needs to do more. “As a hugely export dependent economy, they have the most to gain from others’ fiscal efforts,” he said, “and the most at risk if the global trade contracts further — worse if they are accused of free-riding on leakage from others’ programs.”

Mr. Posen and others argue that while Germany may be doing more stimulus spending than others in Europe, it is counseling other European countries — many of which share the euro as their common currency — not to spend their way out of recession either, but to count on their safety nets to do much of the job.

“They’re the ones who basically browbeat other countries into not spending,” he said, “who give intellectual and political backbone to other countries’ conservative leanings not to stimulate.”

Without knowing it, Mr. Koppe’s 25 employees are playing their small part in keeping the German economy afloat. But nearly 70,000 employees of the automaker Daimler have been placed on short-hour status. On the bright side, it means they are able to play with their children, tend to their gardens or — with further government incentives — receive the kind of advanced training that will make them even more skilled when orders pick up again.

Harder times all but certainly lie ahead for Germany. Commerzbank said Monday that it expected the German economy to contract by a shocking 6 to 7 percent in 2009, roughly double earlier projections and the worst decline of the postwar era. Critics of the German government’s cautious approach to stimulus fear that because Germany is feeling the brunt of the worldwide recession last, its policymakers are underestimating its force.

Indeed, to travel between the United States and Germany is to find two countries experiencing the economic slowdown completely differently. The severity of the downturn does not appear to have sunk in yet in for Germans. There was no real estate bubble here, and few people have a substantial portion of their savings or retirement accounts invested in the stock market. The unemployment rate has risen more than a percentage point, to 8.5 percent in February from 7.1 percent last November. But, significantly, the latest figure is still lower than it was just a year ago.

“In contrast to America, our social systems are not on the decline right now,” Mrs. Merkel said Sunday night in a widely watched interview on a television talk show. “Pensions are not cut, unemployment insurance is not reduced. On the contrary, we can register stable and, in some sectors, also rising expenditures, and this makes me hope that our social market economy will enable us to cope with this complicated situation.”

Michael Hartmann, 49, a welder here at Koppe and one of the workers on shortened hours, said he and his wife were trying to save, buying cheaper groceries and driving less to save on gasoline, but doing nothing as severe as they would if he were laid off. “Of course I’m concerned about the reduced wages, but it’s better than getting fired,” Mr. Hartmann said.

In the meantime, he is learning a complicated welding technique at a nearby vocational school, which he hopes will make him more attractive to his current employer, or others looking for skilled workers.

Victor Homola and Stefan Pauly contributed reporting from Berlin."

described the President Obama’s stimulus measures as the “way to hell"

TO BE NOTED: From the NY Times:

"E.U. President Calls U.S. Stimulus the ‘Way to Hell’

By STEPHEN CASTLE and DAN BILEFSKY

BRUSSELS — Transatlantic tension over the handling of the global economic crisis intensified Wednesday when the prime minister of the Czech Republic, which holds the European Union presidency, described the President Obama’s stimulus measures as the “way to hell.”

Addressing the European Parliament in Strasbourg, France, Prime Minister Mirek Topolanek argued that the Obama administration’s fiscal package and financial bailout “will undermine the stability of the global financial market.”

Mr. Topolanek’s comments, only a day after he offered his government’s resignation following a no confidence vote, took European officials by surprise.

The rotating European Union presidency lasts for six months and the country that holds it is supposed to speak on behalf of the entire 27-nation bloc.

The statement came just a week before a meeting in London of the Group of 20 which will bring together the leaders of the 19 leading industrial and developing nations and the European Union to forge an international consensus on the economic crisis. His comments also underlined potential ideological strains between Washington and Europe as Mr. Obama prepares to travel to Prague in less than two weeks for a summit meeting intended to bolster trans-Atlantic relations and show that the United States and Europe are united over economic policy.

Only five days ago, European Union leaders had reached a carefully constructed political truce designed to bury their differences and agree on a common policy ahead of the London meeting. At last Friday’s European Union summit meeting, they pledged an additional 75 billion euros to finance loans by the International Monetary Fund and to double a credit line for its struggling Eastern European economies.

European countries, including Germany, have resisted calls to increase the scale of their fiscal stimulus, arguing that the G-20 should concentrate on tightening financial regulation.

One European Union official, speaking on the condition of anonymity because of the sensitivity of the issue, said the comments reflected that, unlike other Eastern European countries like Hungary, the Czech economy has proved relatively resilient.

“He is sitting in the Czech Republic,” the official said “where growth is holding up relatively well and a fiscal stimulus makes no sense.”

“He has never been in favor of a big fiscal stimulus — though he did not argue against it at the E.U. summit.”

Analysts in Prague said that Mr. Topolanek was eager to show Europe that he was still politically relevant despite the collapse of the government. They noted that his railing against interventionism was consistent with the liberal economic ideology of his center-right Civic Democratic party.

In recent months, he has sparred with opposition Social Democrats over their calls for increased spending during the economic downturn.

While Mr. Obama in recent weeks has pleaded with European partners to stimulate the economy, countries like the Czech Republic, which endured decades of Communism, are deeply suspicious of state intervention.

The Czech leader’s comments were likely to come as an embarrassment to Gordon Brown, the British prime minister, who was visiting the United States on Wednesday as part of the preparations for hosting the G-20 meeting.

Martin Schulz, leader of the socialist group in the European Parliament, said that the description of the Obama recovery plans as “the road to hell” was “not the level on which the E.U. ought to be operating with the United States.”

“You have not understood what the task of the E.U. presidency is,” Mr. Schulz told Mr. Topolanek.

Stephen Castle reported from Brussels and Dan Bilefsky from Prague."

European leaders have woefully underestimated the crisis and possibly still do

TO BE NOTED: I'VE BEEN SAYING THAT BEGGARING THY NEIGHBOR HAS BEEN GOING ON ALL ALONG: From the FT:

"Narrow-minded leadership hurts Europe

By Wolfgang Münchau

Published: February 15 2009 19:27 | Last updated: February 15 2009 19:27

“It is justifiable if a factory of Renault is built in India so that Renault cars may be sold to the Indians. But it is not justifiable if a factory ... is built in the Czech Republic and its cars are sold in France” – Nicolas Sarkozy, president of France.

This is a troubling statement indeed. But instead of launching a tirade against Mr Sarkozy, I would like to make an observation that is perhaps not immediately evident: his statement is entirely consistent with the way the European Union has reacted to the financial crisis.

To see the link between crisis management and the rise in protectionism, look at the initial policy response to last September’s financial shockwaves. European leaders have woefully underestimated the crisis and possibly still do. The European economy is now heading towards a depression, with German gross domestic product falling at an annualised rate of almost 9 per cent. The early misjudgment of the crisis resulted in stimulus packages with two defects. They were initially too small but, more importantly, they were not co-ordinated. One important aspect of the economic meltdown is the presence of strong cross-country spillovers, both globally and inside the EU. The policy response failed to take account of these spillovers.

For the bank bail-out programmes, the EU managed to set a minimum level of competition rules, but these programmes, too, were national and not co-ordinated. So how does the combined effect of these two unco-ordinated responses lead to protectionism?

If stimulus money is dispersed at national level, governments naturally try to make sure that the money stays inside their countries. The prospect that consumers might spend the money on imported goods was one of the reasons why eurozone governments were reluctant to cut taxes. Because of EU competition rules, the same logic also applies to government purchases. Under those rules, governments had to open public projects to EU-wide tenders. If you play by the rules, keeping the cash in your country is not easy.

Governments have since relaxed those rules. In other words, if you want to make sure that these programmes function in their warped way, you have to dismantle the single market. The same logic applies to the bank rescue packages. If the European Commission tried to block each uncompetitive bank rescue, it would be blamed for causing a financial collapse. Governments have found a way to circumvent the EU, by breaking so many rules at once, that the Commission cannot even begin to react effectively.

Expect to see three effects with progressively destructive force. The first is that the stimulus is much less effective than it could otherwise have been. When everybody tries to gain a competitive advantage over each other, the effects usually cancel out.

Second, the stimulus and bank rescue packages harm the single European market directly. The French subsidies are more blatant, as is the protectionist rhetoric of its president. But everybody in Europe plays the same game. It is not as though the single market is the default position for European commerce. Much of the service sector is exempted. Europe lacks an effective pan-European retail infrastructure and retail banking system. Reversing this programme long before it is completed would be a mistake.

Third, and most destructive, the combined decision on stimulus and financial rescue packages poses an existential threat to monetary union. A blanket loan guarantee to every bank, as most governments have granted, in combination with indiscriminate capital injections and a reluctance to restructure, will mean the transformation of private into sovereign default risk – aggravated further by the economic downturn. Some insolvent banks are now owned by the state, while the bulk of damaged, not-yet-insolvent banks are lingering on, hoarding cash. This programme is a drain of resources with no resolution in sight.

I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable.

When European leaders meet for their anti-protectionism summit on March 1, they will produce warm words to reaffirm their commitment to the single market. I suspect they will continue to misdiagnose the crisis. Protectionism is not the root of the problem. The protectionism we are experiencing now is caused by co-ordination failure. It is neither sudden, nor surprising.

The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure"

"At the end of the day, they know there's no alternative to the market economy."

From the Washington Post:

"Economic Crisis Fuels Unrest in E. Europe
Shaky Governments Face Growing Anger

By Philip P. Pan
Washington Post Foreign Service
Monday, January 26, 2009; A01

RIGA, Latvia -- On a frigid evening this month, more than 10,000 people gathered outside a 13th-century cathedral in this Baltic capital to protest the government's handling of Latvia's economic crisis and demand early elections. The demonstration was one of the largest here since the mass rallies against Soviet rule in the late 1980s, and a sign of both the public's frustration and its faith in the political system.

But at the end of the night, as the crowd dispersed, the protest turned into a riot. Hundreds of angry young people, many drunk and recently unemployed, rampaged through the historic Old Town, smashing shop windows, throwing rocks and eggs at police, even prying cobblestones from the streets to lob at the Parliament building.

Similar outbursts of civil unrest have occurred in recent weeks across the periphery of Europe, where the global financial crisis has buffeted smaller countries with fewer resources to defend their economies. Especially in Eastern Europe, the turmoil reflects surging political discontent and threatens to topple shaky governments that have been the focus of popular resentment over corruption for years. ( YES )

Europeans have compared the unrest to events of the 1960s and even the 1930s, when the Great Depression fueled political upheaval across the continent and gave rise to isolationism and fascism. But no ideology has tapped into public anger and challenged the basic dominance of free-market economics and democratic politics in these countries( GOOD NEWS SO FAR ). Instead, protesters appear united primarily by dashed economic hopes and hostility against the ruling authorities.

"The politicians never think about the country, about the ordinary people," said Nikolai Tikhomirov, 23, an electronics salesman who participated in the Jan. 13 protest in Riga. "They only think of themselves."

Days after the riot, a demonstration by 7,000 protesters in neighboring Lithuania turned violent, leading police to respond with rubber bullets. Fifteen people were injured. Smaller protests and clashes have erupted in Bulgaria, the Czech Republic and Hungary, following weeks of street violence in Greece last month. On Thursday, police in Iceland used tear gas for the first time in half a century to disperse a crowd of 2,000 protesting outside Parliament in Reykjavik. The next day, Prime Minister Geir Haarde agreed to call early elections and said he would step down.

Dominique Strauss-Kahn, head of the International Monetary Fund, said the financial crisis could cause further turmoil "almost everywhere," listing Latvia, Hungary, Belarus and Ukraine as among the most vulnerable nations. "It may worsen in the coming months," he told the BBC. "The situation is really, really serious."( I AGREE )

There is particular concern about the relatively young and sometimes dysfunctional democracies that emerged after the fall of communism in Eastern Europe, where societies that endured severe hardship in the 1990s in the hope that capitalism and integration with the West would bring prosperity now face further pain.

"The political systems in all these countries are fragile," said Jonathan Eyal, director of international security studies at the Royal United Services Institute, a research group in London. "There's a long history of unfulfilled promises and frustration with the political elites going back to the Communist era."

Eyal warned of a revival of ethnic conflict in the region, where most countries have large minority populations, adding that tensions could rise after workers who have lost jobs in Western Europe return home. But he noted that extreme nationalist movements have won only limited support in Eastern Europe in recent years.

"People here instinctively know the idea of a strongman who imposes order doesn't work," he said, arguing that the region's history with Communist rule, its integration with the European Union and its anxiety about Russia's intentions make a turn toward authoritarianism unlikely. "They have seen the past, and a return to previous populist schemes isn't very persuasive. At the end of the day, they know there's no alternative to the market economy."( I HOPE HE'S RIGHT )

That assessment rings true in Latvia, where the government's approval ratings have fallen as low as 10 percent -- the worst in the European Union, and lower than at any other time in the nation's post-Soviet history -- but where people scoff when asked if they want to abandon markets and political freedoms.

"If some politician said, 'Let's leave the E.U., give up democracy and free markets,' you can be sure that nobody would vote for him," said Aigars Freimanis, director of Latvia's largest polling firm. The memory of Soviet occupation makes it difficult even for mildly left-wing parties to win elections, he said.

But Freimanis said public anger could bring significant political change, noting that the crisis has renewed debate on constitutional reforms, including measures to give citizens the right to dismiss Parliament and to vote for individual lawmakers instead of only political parties.

"We want more democracy, not less( GOOD )," said Renata Kalivod, 28, a social worker who attended the protest in Riga. She said that her father, who recently lost his job, had given up on elections but that she still believed it was possible for the public to have an impact. "If I gave up, I would leave the country like other young people. But I'm still here," she said.

After enjoying double-digit growth rates that were among the highest in the E.U., Latvia is now struggling to defend its currency and survive a sharp slowdown. The economy is forecast to shrink by 5 percent this year, after a 2 percent drop last year. Unemployment has doubled in the last six months to 8 percent, with the rate three times as high among young people.

Forced to accept a $10.5 billion bailout from the IMF, the European Union and other sources -- including neighboring Estonia, a fact some considered humiliating -- the government has embarked on an austerity program involving 25 percent budget cuts, 15 percent wage reductions for civil servants and large-scale layoffs.

Aigars Stokenbergs, an opposition leader in Parliament who quit the ruling coalition and helped organize this month's protest, said the public was as upset about corruption as economic mismanagement. The same conservative parties have dominated the government for years, he said, and many believe they serve a handful of billionaires who struck it rich in the privatization schemes of the 1990s.

"People don't want this government anymore. They don't trust it," he said, criticizing Parliament for firing the nation's anti-corruption chief in June and adopting the IMF reforms in a single day without consulting unions, businesses or other groups.

But Andris Berzins, a leader in the ruling coalition and former prime minister, said the public's anger is misplaced because the country's problems are rooted in decisions by previous administrations to expand spending instead of building up reserves. "The government needs to take some very serious economic reforms, but it hasn't been able to build public support for them," he said.

Public anger intensified in December when the finance minister, Atis Slakteris, badly fumbled an interview on Bloomberg Television. Asked what had caused Latvia's economic crisis, he replied, "Nothing special." The words were soon emblazoned on T-shirts and shop windows as parodies proliferated on the Internet.

The riots, which left about 25 people injured and resulted in 106 arrests, have unnerved people in part because Latvia has practically no history of such violence. Some are worried the crisis will exacerbate tensions between ethnic Latvians and the nation's Russian-speaking minorities, who make up more than a third of the population.( THIS ETHNIC CONFLICT IS WORRYING )

President Valdis Zatlers has responded by distancing himself from the ruling coalition that elected him and essentially siding with the opposition, threatening to dismiss Parliament if it fails by March 31 to pass a set of reforms and take other specific actions to build public trust.

But under Latvia's aging constitution, the president must call an unprecedented referendum to dismiss Parliament. Early elections would be held if it passed, followed by talks to form a new government. The entire process could take more than eight months, and some say such a prolonged period of political uncertainty would hinder Latvia's efforts to repair its economy, resulting in further unrest.

Governments across Eastern Europe face similar uncertainty, and analysts said the timing of electoral cycles could determine which ones fall. Newly elected governments in Lithuania and Romania might survive, for example, while the Bulgarian government faces elections this summer and is in trouble.

Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington, said it makes sense in Latvia to hold new elections because the current Parliament is "utterly discredited" and can do little for the economy in any case. "You can't have a government that has no support," he said. "It's useless."( TRUE )

Analysts said the E.U. serves as a bulwark against radical politics in the region, but they warned of a backlash if the developed nations that dominate policymaking ignored the problems of the smaller ones( YES ). In Latvia, politicians and business leaders complain about E.U. agricultural subsidies that benefit farmers in Western Europe and trade barriers in the service sector. But they have praised the E.U.'s swift response to the country's economic crisis so far.

Pavel Nazarov, 21, a physics student who participated in the rally, said he welcomed E.U. intervention for another reason. "They can keep an eye on our corrupt politicians," he said, "even when we can't."

All in all, considering there are protests and riots, this is good news.

The EU only last December added 11 names to a list of some 160 officials, including Mugabe himself, banned from entering the bloc.

Finally. From Reuters:

1 of 1Full Size

BRUSSELS (Reuters) - The European Union will next Monday step up pressure on Zimbabwe's President Robert Mugabe to share power by urging a probe into whether diamond sales are being used to support his government, a draft showed.

The bloc's foreign ministers, who meet in Brussels on January 26, will also add names to a list of Zimbabwean officials banned from travelling in the EU because of their links to alleged human rights abuses, a draft EU paper obtained by Reuters showed.( FINALLY )

"The (EU) Council supports action to investigate the exploitation of diamonds from the site of Marange/Chiadzwa and their significance in possible financial support to the regime and recent human rights abuses," the document, which will be presented to EU ministers, said.

The draft urges the Kimberley Process -- an international certification scheme set up to ensure diamonds do not fund conflict -- "to take action with a view to ensure Zimbabwe's compliance with its Kimberley obligations".

Alongside platinum and gold, diamonds are among the natural wealth that Zimbabwe could expect to profit from if it emerges from a humanitarian and economic crisis that has seen thousands die of cholera and inflation rocket to stratospheric rates.

The World Diamond Council industry body has put Zimbabwe's production of rough diamonds at 0.4 percent of world production, mostly exported with the Kimberley Process certificate. However in December it raised concern about possible illegal exports "for the personal gain of a few".

Despite growing international pressure on him to step down, power-sharing talks between Mugabe and opposition leader Morgan Tsvangirai remain deadlocked in a dispute over cabinet posts.

"The (EU) Council condemns the regime for its ongoing failure to address the most basic economic and social needs of its people ... The Council urges stakeholders to comply with the power sharing agreement," the EU draft said. ( THANK GOD )

Critics say Mugabe's policies, such as the seizure of white-owned farms, have ruined Zimbabwe's economy, but the ruler -- in power since independence from Britain in 1980 -- blames Western sanctions for the crisis. ( HE'S A LYING DESPOT )

The EU only last December added 11 names to a list of some 160 officials, including Mugabe himself, banned from entering the bloc. The EU draft did not say how many more would be added."

Get going!

“In the end, either banks will have to be nationalized or have their bad loans split off into another institution."

From the NY Times:

"In Europe, New Efforts to Bolster Lending

By DAVID JOLLY

PARIS — After a first round of costly bank bailouts and stimulus programs came up short, governments in Europe and the United States are moving more forcefully to assure that bailed-out banks lend more money( MORE LIKE DON'T NEED TO HOARD MONEY ) to offset the recession that has engulfed both continents.

On Monday, a day after officials of the incoming Obama administration promised to take steps to force banks to lend, Britain outlined details of a new £100 billion, or $147.5 billion, plan to limit banks’ losses from troubled assets in exchange for their pledge to increase the flow of credit.

“In return for access to any government support, there will have to be an increase in lending, and that will be legally binding,” Gordon Brown, the British prime minister, said.

As if to illustrate the depths of the problem, the Royal Bank of Scotland warned on Monday that it faced losses of up to £28 billion or $41 billion for 2008, a record for any British company. The bank’s already depressed shares fell nearly 67 percent, touching off a rout in European financial stocks that could extend to United States markets when they reopen on Tuesday.

The second round of efforts in Britain and Europe to jump-start lending comes as the region girds for a more painful recession than expected. The European Commission warned on Monday that the 27-nation European Union faced a “deep and protracted recession” that would shrink the economy by 1.8 percent in 2009 and cut 3.5 million jobs across the bloc.

Adding to the sense of urgency, Standard and Poor’s ratings agency downgraded Spain’s sovereign debt from its AAA rating. Greece’s sovereign debt was cut on Wednesday, rekindling worries about what might happen to the euro zone as a whole if a member were to default on its public debt.

The bleak prospects have prompted leaders to try other ways of urging banks to lend as it becomes more clear that the bailout measures pledged by governments at the height of the financial crisis in autumn have not flushed away the bad loans that still clog the system( THEY ARE STILL BEING CALLED ). If anything, the problems are set to worsen as the downturn accelerates( YES ).

President Nicolas Sarkozy of France is to meet on Tuesday evening with French bankers to press them to lend more money to French businesses. “The banks must understand that the times have changed,” Christine Lagarde, the finance minister, told a business daily, Les Échos, on Monday. The French plan would require banks receiving new capital injections to make “precise commitments,” including giving up bonuses this year, she said.

Late Sunday, Denmark announced an $18 billion aid plan for its banks, saying it would inject the funds on the condition that the recipients increase lending.

In Germany, Deutsche Bank’s chief executive, Josef Ackermann, who is also chairman of the Institute of International Finance, an organization of the world’s largest financial institutions, suggested last week that the creation of so-called bad banks might be the way forward( A POOR WAY, BUT IT IS A WAY. ).

In a bad-bank arrangement, governments would buy up scorched( ANOTHER NEW TERM? ) assets, said George Magnus, senior economic adviser at UBS Investment Bank in London. That contrasts with the method now being used in the United States and Britain, where troubled assets remain on the balance sheet, but losses beyond some limit are insured by the government.( COULD ALSO WORK. THE GUARANTEE IS THE IMPORTANT THING TO ENDING THE CALLING RUN. )

“There is no ‘right’ way and both schemes have their merits and drawbacks( A FAIR POINT ) under given and local circumstances,” Mr. Magnus wrote in a research note. He said the bad-bank plan might be more suited to the United States, while Britain might be able to manage with its plan for an insurance program because it has far fewer banks.

Members of the incoming Obama administration are considering proposals that include buying up bad assets, a return to the original vision of the $700 billion Troubled Asset Relief Program.

“The focus isn’t going to be on the needs of banks,” Mr. Obama’s chief economic adviser, Lawrence H. Summers, said on the CBS program “Face the Nation.” “It’s going to be on the needs of the economy for credit.”

Simon Adamson, a banking analyst at CreditSights, an independent research firm in London, said he thought that Europe was also “edging toward the creation of bad banks.”

Under Britain’s latest bank bailout, its Treasury will “protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets” in return for a fee. Participating institutions will take the initial losses, with the Treasury bearing about 90 percent of the rest( YIKES ).

Britain’s central bank could buy up to £50 billion worth of “high-quality assets” from banks, giving it more monetary policy tools after it cut its benchmark interest rate to a record of 1.5 percent this month. The government is also extending measures to increase liquidity, including a £250 billion program to let banks to issue government-backed( THE GUARANTEE IS THE IMPORTANT THING ) bonds. The latest steps would cost taxpayers an additional £100 billion on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November.

Mr. Brown said he was angry at Royal Bank, whose losses include as much as £20 billion of good-will write-downs from the acquisition of a portion of another bank. “Almost all their losses are in the subprime markets in America and related to the acquisition of the bank ABN Amro,” he said. “And these are irresponsible( NEGLIGENT ) risks, which were taken by a bank with people’s money in the United Kingdom.”

European bank stocks fell sharply on Monday on fears that more pain, including the wiping out of some shareholders, might lie ahead( TRUE ). Last week, the Irish government nationalized the Anglo Irish Bank, rendering equity stakes worthless.

Peter Dixon, a global equities economist in London for Commerzbank, said the latest British rescue plans were “a step in the right direction.” But, he added, “In the end, either banks will have to be nationalized or have their bad loans split off into another institution. That’s the only way they will be clear( GUARANTEED. ONLY THE GOVERNMENT CAN DO THIS. ) about their capital positions( YEP ).”

Carter Dougherty contributed reporting from Frankfurt."

"The worst riots since the fall of Communism have swept the Baltics and the south Balkans."

Ambrose Evans-Pritchard on the Telegraph:

"Events are moving fast in Europe. The worst riots since the fall of Communism have swept the Baltics and the south Balkans. An incipient crisis is taking shape in the Club Med bond markets. S&P has cut Greek debt to near junk. Spanish, Portuguese, and Irish bonds are on negative watch.

Dublin has nationalised Anglo Irish Bank with its half-built folly on North Wall Quay and €73bn (£65bn) of liabilities, moving a step nearer the line where markets probe the solvency of the Irish state.

A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece's social fabric is unravelling before the pain begins, which bodes ill.

Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe's monetary project – either in EMU or preparing to join – and each is trapped.

As UKIP leader Nigel Farage put it in a rare voice of dissent at the euro's 10th birthday triumph in Strasbourg, EMU-land has become a Völker-Kerker – a "prison of nations", to borrow from the Austro-Hungarian Empire.

This week, Riga's cobbled streets became a war zone. Protesters armed with blocks of ice smashed up Latvia's finance ministry. Hundreds tried to force their way into the legislature, enraged by austerity cuts.

"Trust in the state's authority and officials has fallen catastrophically," said President Valdis Zatlers,
who called for the dissolution of parliament.

In Lithuania, riot police fired rubber-bullets on a trade union march. Dogs chased stragglers into the Vilnia river. A demonstration outside Bulgaria's parliament in Sofia turned violent on Wednesday.

These three states are all members of the Exchange Rate Mechanism (ERM2), the euro's pre-detention cell. They must join. It is written into their EU contracts.

The result of subjecting ex-Soviet catch-up economies to the monetary regime of the leaden West has been massive overheating. Latvia's current account deficit hit 26pc of GDP. Riga property prices surpassed Berlin.

The inevitable bust is proving epic. Latvia's property group Balsts says Riga flat prices have fallen 56pc since mid-2007. The economy contracted 18pc annualised over the last six months.

Leaked documents reveal – despite a blizzard of lies by EU and Latvian officials – that the International Monetary Fund called for devaluation as part of a €7.5bn joint rescue for Latvia. Such adjustments are crucial in IMF deals. They allow countries to claw their way back to health without suffering perma-slump.

This was blocked by Brussels – purportedly because mortgage debt in euros and Swiss francs precluded that option. IMF documents dispute this. A society is being sacrificed on the altar of the EMU project.

Latvians have company. Dublin expects Ireland's economy to contract 4pc this year. The deficit will reach 12pc of GDP by 2010 on current policies. "This is not sustainable," said the treasury. Hence the draconian wage deflation now threatened by the Taoiseach.

The Celtic Tiger has faced the test bravely. No government in Europe has been so honest. It is a tragedy that sterling's crash should have compounded their woes at this moment. To cap it all, Dell is decamping to Poland with 4pc of GDP. Irish wages crept too high during
the heady years when Euroland interest rates of 2pc so beguiled the nation.

Spain lost a million jobs in 2008. Madrid is bracing for 16pc unemployment by year's end.

Private economists fear 25pc before it is over. Spain's wage inflation has priced the workforce out of Europe's markets. EMU logic is wage deflation for year after year. With Spain's high debt levels, this is impossible.

Either Mr Zapatero stops the madness, or Spanish democracy will stop him. The left wing of his PSOE party is already peeling off, just as the French left is peeling off to fight "l'euro dictature capitaliste".

Italy's treasury awaits each bond auction with dread, wondering if can offload €200bn of debt this year. Spreads reached a fresh post-EMU high of 149 last week. The debt compound noose is tightening around Rome's throat. Italian journalists have begun to talk of Europe's "Tequila Crisis" – a new twist.

They mean that capital flight from Club Med could set off an unstoppable process.

Mexico's Tequila drama in 1994 was triggered by a combination of the Chiapas uprising, a current account haemorrhage, and bond jitters. The dollar-peso peg snapped when elites began moving money to US banks. The game was up within days.

Fixed exchange systems – and EMU is just a glorified version – rupture suddenly. Things can seem eerily calm for a long time. Politicians swear by the parity. Remember John Major's "soft-option" defiance days before the ERM blew apart in 1992? Or Philip Snowden's defence of sterling before a Royal Navy mutiny forced Britain off the Gold Standard in 1931.

Don't expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia.

Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up "roll-over risk" for later in the year. Hedge funds are circling.

Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in "repo" actions.

In other words, the ECB is already providing a stealth bail-out for Europe's governments – though secrecy veils all.

An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany's hard-working citizens find out?"

I don't know if he correct. What interests me is the social disruption and dislocation being seen in the wake of this Calling Run ( Debt-Deflation Spiral, Deleveraging ). This is the main reason it is silly to allow the run to go on until it stops of its own will. By that time, the least of our problems will be economic. People who see free market ideology as the ideology that will be chosen at the end of this run are sadly mistaken. It is much more likely to be deemed the cause.

"But it is a price worth paying for boosting its political independence."

A good post on the FT:

"Gas war flares up

Published: December 17 2008 19:56 | Last updated: December 17 2008 19:56

For the fourth year running, Russia and Ukraine are deadlocked in their annual gas contract talks, generating fears that supplies in the region and in the European Union might be interrupted over the new year.

Gazprom, the Russian state-controlled gas group, has toured EU capitals to explain why, if the gas goes off on January 1, it will all be Ukraine’s fault. The company wants to pre-empt charges that it is all a dastardly Kremlin campaign to hit Kiev’s pro-west administration.

EDITOR’S CHOICE

Lex: Russian economy - Dec-16

Moscow hints at reduction in oil output - Dec-11

Analysis: So long, super-cycle - Dec-09

Gazprom looks to fuel growth - Dec-09

Gazprom and Ukraine in debt dispute - Dec-08

In depth: Oil - Dec-11

Gazprom protests too much. The gas trade is so opaque that it is difficult to say where the dividing lines lie between politics, commerce and the personal interests of those running the business in central Asia, Russia and Ukraine( TRUE ). But it is clear that in this high-stakes game, Russia holds the top cards( THEY HAVE THE GAS. ). So it is fair to assume that if Russia really wanted to take politics out of the trade it would do so( TRUE ).

That said, Ukraine could do much more to stabilise its end of the business. Instead of constantly casting itself as a victim of Russian bullying, it should bolster its bargaining position. First, it should pay its gas debts on time so that arrears do not, as they always do, become a weapon in Gazprom’s hands( TRUE ). Next, it must finish the half-complete reform of the domestic market so that gas flows transparently to consumers in one direction and cash flows back, in accountable ways, in the other( YES ). Finally, Kiev, in co-operation with Moscow, must fulfil pledges to cut intermediaries out of the wholesale trade and strike a direct deal with Gazprom( A GOOD IDEA ).

None of this will be easy given the confusion in Ukraine’s domestic politics, rampant corruption in the gas trade( YES ) and the severe pressure that the world economic crisis is putting on Kiev. But once it is done, Ukraine will be in a far better position to resist Russian pressure( GOOD ).

Whatever happens, Ukraine will probably end up paying more for its gas as Russia targets the reasonable goal( YES ) of raising prices and ending Communist-era subsidies. Gazprom has already done this in other ex-Communist countries, including the Baltic states, which have equally difficult political ties with Moscow. It has no reason to make an exception of Ukraine( YES ).

For Kiev a bigger gas bill will be a burden in the looming recession. But it is a price worth paying for boosting its political independence( YES )."

"consumers in the west do have the power to limit their funds."

Caroline Sourt in the Guardian about the East Congo, and what we can do about it ( which isn't much ):

"Caroline Sourt

• 
  
• guardian.co.uk, Thursday 25 December 2008 17.00 GMT
• Article history

As Simon Tisdall has pointed out on Comment is Free, the conflict in eastern Democratic Republic of the Congo looks intractable – and there is little appetite, in Britain or elsewhere, to send more troops there. But while the fighting is not going to stop as long as militias control the region's natural resources, consumers in the west do have the power to limit their funds( GOOD ).

One of the precious metals mined in eastern Congo is coltan. It is used in many common products: mobiles, computers, digital cameras, GPS equipment, airbags, hearing aids and even pacemakers. While 80% of the world's known coltan reserves are in eastern Congo, only about 1% of the metal sold on the open market is Congolese.

The reality is that most of Congo's coltan is sold illegally and the revenue, instead of going towards the country's development, is helping to fund the ongoing violence. The coltan mines in the east are controlled by various armed groups. One of the consequences is that civilians, including children, are recruited as forced labour. The mortality rate in these mines is high.

In a UN report discussed yesterday by the security council, the Congolese and Rwandan governments are accused of backing militias to fight a "war by proxy". All the groups, including the Congolese army, are accused of human rights violations that range from massacres and torture to widespread rape of women and children. In this on-off war, it's estimated that 45,000 people die each month( 45,000 ); since August, 250,000( 250,000 ) have been displaced.

The UN's force in Congo, Monuc, has so far failed to stop the fighting, despite being the largest and most expensive peacekeeping mission in the world( COME ON ). Democratic Republic of the Congo is the size of western Europe: 17,000 troops, or even the proposed increase to 20,000-strong force, are insufficient. The EU recently refused to send in soldiers, preferring to try political negotiations. What it should be doing is to regulate the international sales of Congolese minerals more efficiently( TRUE ).

Just as blood diamonds fuelled the civil war in Sierra Leone, the illegal trade fuels the DRC conflict. As long as militias and politicians continue to make money from minerals, there is no real incentive to find a lasting peace( I SUPPOSE THAT'S TRUE ). The companies involved in buying Sierra Leone's diamonds only located their consciences when consumers started asking questions about where their gems were coming from, and profits were threatened.

A certificate systemis supposed to detail the origins of any coltan, but it is not strictly adhered to. Many companies don't ask and if they do, they settle for vague answers and fraudulent papers because Congo's coltan is abundant and much cheaper than that of rival exporters.

Now, a break. From Reuters:

"By Joe Bavier

KINSHASA (Reuters) - Democratic Republic of Congo hopes to set up a scheme to certify columbite-tantalite produced within its borders in 2009, the country's Deputy Mines Minister Victor Kasongo said on Tuesday.

The illegal traffic of the rare metal, used in mobile phone chips and commonly referred to as coltan, helped fuel a 1998-2003 war and resulting humanitarian crisis in the central African country that killed an estimated 5.4 million people.

But a new G8-backed and German-financed pilot initiative aimed at creating a mineral fingerprint for coltan could soon help developing countries trace ore that is illegally exported and boost their profits from legal exports.

Kasongo said he hoped a global certification process aimed at ethically-minded consumers would follow.

"All the large companies are fighting for this. They'll be able to display a certificate to prove fair trade. You'll begin seeing many machines, many iPods, that are certified," he said.

Congo plans to use the data to set up its own certification process within the next eight months, which should help the creation of a global system similar to the Kimberley Process set up to end the trade in "blood diamonds" from war zones.

"We believe that in 2009 we should be able to enforce certification ... early next year," Kasongo told Reuters in an interview. "Licences. Centralised control. Certification. More revenues to Congo. More peace and stability. Those are the things we are aiming for."

A team from Germany's Federal Institute for Geosciences and Natural Resources is due to arrive in Congo on April 2.

Researchers will map the country's coltan producing areas and isolate unique characteristics of local ore samples to create mechanisms for tracing ore to its origin.

"BLOOD COLTAN"

Congo, believed by many experts to possess the world's largest coltan reserves, was one of the principal suppliers of the ore as demand from the mobile phone and electronics industries spiked in the late 1990s.

Much of the so-called "blood coltan" originating in Congo was illegally smuggled into Uganda, Rwanda, and Burundi during a five-year war that saw the plunder of its natural resources by neighbours and foreign-backed militias.

Congo's coltan-rich eastern borderlands remain a patchwork of militia-controlled zones and rebel fiefdoms, where a United Nations Security Council-commissioned report recently said illegal armed groups still buy weapons with mining revenues.

Ethical concerns and more efficient industrialised mining have now made Australia the world's leading producer and exporter of coltan.

Congo hopes the certification process will rehabilitate the image of its coltan and help to stabilise its eastern reaches.

"We'll make sure that the coltan is not linked to any military activities. We understand that once we have control of the coltan itself, we'll have some control over the stability of the area," Kasongo said."

Back to our post:

The vast majority of those who donate to charitable appeals for Congo are unaware that their Christmas present purchases are probably feeding the conflict as fast as charities can alleviate it. Asking a few more questions about the gifts we buy would force the suppliers to come clean about their origins."

It's the least that we can do.

"Yet the good news shows that we will lose the battle against poverty and misery only if we give up "

Jeffrey Sachs with some good news in the Guardian:

"Good news in bad times

"Let's celebrate the global successes in fighting poverty, disease and hunger

Comments (20)

• Jeffrey D Sachs
• guardian.co.uk, Sunday 21 December 2008 14.00 GMT
• Article history

At a time when the headlines are filled with financial crises and violence, it is especially important to recognise the creativity of many governments in fighting poverty, disease and hunger( GOOD IDEA ). The point is not merely to make ourselves feel a little better, but rather to confront one of the world's gravest threats: the widespread pessimism( IT MIGHT BE REALISM, BUT, YOU'RE RIGHT, WE SHOULD TRY, IN ANY CASE ) that today's problems are too big to be solved. Studying the successes gives us the knowledge and confidence to step up our shared efforts to solve today's great global challenges.

Hats off, first, to Mexico for pioneering the idea of "conditional cash transfers" to poor households. These transfers enable and encourage those households to invest in their children's health, nutrition and schooling.

Mexico's opportunities programme, led by the president, Felipe Calder, is now being widely emulated around Latin America. Recently, at the behest of the singers Shakira and Alejandro Sanz, and a social movement called Alas that they lead, all of Latin America's leaders have committed to step up the region's programmes for early childhood development, based on successes that have been proven to date. ( SOUNDS GOOD )

Norway, under the leadership of prime minister, Jens Stoltenberg, is maintaining its tradition of creative social and environmental leadership. The government has put together a global alliance to prevent maternal death in childbirth, investing in safe delivery and the survival of newborns. At the same time, Norway launched an innovative $1bn (£0.66bn) programme with Brazil to induce poor communities in the Amazon to end rampant deforestation. Cleverly, Norway pays out the funds to Brazil only upon proven success in avoiding deforestation, compared with an agreed baseline.( GOOD IDEAS )

Spain, under the leadership of the prime minister, José Luis Rodríguez-Zapatero, has given a major stimulus to helping the poorest countries to achieve the UN millennium development goals (MDGs). Spain created a new MDG fund at the United Nations to promote the co-operation needed within the UN to address the various challenges of the MDGs. ( WORTH A SHOT )

The Spanish government rightly proposed that true solutions to poverty required simultaneous investments in health, education, agriculture and infrastructure, and then the Spanish put up the funds to help make that integrated vision a practical reality. Spain will host a meeting in January to launch a new fight against global hunger. Once again, Spain is proposing practical and innovative means to move from talk to action, specifically to help impoverished peasant farmers to get the tools, seeds and fertiliser they need to increase their farm productivity, incomes and food security. ( WE NEED TO SEE IF THEY WORK. IF SO, FINE )

The Australian prime minister, Kevin Rudd, has similarly surged to the forefront of global problem solving, putting forward a bold action plan on climate change and proposing new and practical( A KEY CONCEPT ) means to address the MDGs. Australia put real money on the table for increased food production, along the lines that Spain is proposing. It also champions an increased programme of action for the poor and environmentally threatened island economies of the Pacific region.( FINE )

These efforts have been matched by actions in the poorest countries. The landlocked and impoverished country of Malawi, under the leadership of President Bingu wa Mutharika, has doubled its annual food production since 2005 through a pioneering effort to help its poorest farmers. The programme has been so successful that it is being emulated across Africa( GOOD ).

Mali's government, under President Amadou Toumani Touré, has recently put forward a bold challenge to the world community. Mali is eager to scale up investments in agriculture, health, education and infrastructure in its 166 poorest communities. The plans are detailed, thoughtful, credible and based on proven successes that the government has already achieved. The rich world has promised to help Mali, and now Mali has led the way with its creativity( GOOD FOR THEM ).

There are countless more cases that can be mentioned. The European Union has launched a €1bn (£0.93bn) effort to help peasant farmers. The Gates Foundation, Unicef, Rotary International and many governments have succeeded in bringing down polio deaths to one-thousandth of the rate a generation ago, bringing the disease to the verge of eradication. Similar efforts are under way on many other fronts: the control of worm infections and leprosy, and a major global effort to bring malaria deaths nearly to zero by 2015.( VERY GOOD )

All of these successes, and many more, share a similar pattern. They address a well-defined( KEY ) and serious challenge, for example, low food production or a specific disease, and are based on a well-defined( KEY ) set of solutions, such as the supply of agricultural equipment and inputs needed by peasant farmers or immunisations.

Small-scale demonstration projects prove how success can be achieved; the challenge then becomes taking the solutions "to scale" in nationwide or even worldwide programmes ( TRUE ). Leadership is needed within the countries in need as well as among the rich nations that can help to launch and finance the solutions. Finally, modest amounts of money, directed at practical problem solving, can make an historic difference( I'M FOR IT IF IT'S ASSESSED FOR SUCCESS ).

Bad news can crowd out good news, especially in times of serious financial crisis and political unrest. Yet the good news shows that we will lose the battle against poverty and misery only if we give up and fail to heed the intelligence and goodwill that can be mobilised today. And perhaps next year, the US will rejoin the global effort with a new and remarkable force, led by a young president who has rightly told Americans and the world that "Yes, we can"."

No more about Bush. I'm begging you. I'm counting the seconds.