…look where Greece has ended up after five years of crisis resolution. It has had one of the worst performances in economic history; yet we have just concluded an extension of the same policy.

Can this be sustainable? The pragmatists in Europe’s chancelleries say they can roll over loans indefinitely at very low interest rates. Economically, this is the equivalent of a debt writedown; yet politically it is easier to deliver because you do not need to recognise losses. The equivalent statement in a military conflict would be: if you renew a ceasefire often enough, you end up with peace.

This type of argument is not only immoral and dishonest. It also does not work. While you play this game of ex­tend-and-pretend, the real economy implodes: austerity has caused a meltdown in income and employment. Monetary policy mistakes caused a fall in eurozone-wide inflation rates that made it impossible for Greece and other periphery countries to improve the competitiveness they lost in the early years of monetary union.

If the EU deals with Ukraine in the same way it dealt with Greece, you can expect to see a parallel development in a few years.

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At first, Eva Christiansen barely noticed the number. Her bank called to say that Ms. Christiansen, a 36-year-old entrepreneur here, had been approved for a small business loan. She whooped. She danced. A friend took pictures.

“I think I was so happy I got the loan, I didn’t hear everything he said,” she recalled.

And then she was told again about her interest rate. It was -0.0172 percent ”” less than zero. While there would be fees to pay, the bank would also pay interest to her. It was just a little over $1 a month. But still.

These are strange times for European borrowers, as if a wormhole has opened up to a parallel universe where the usual rules of financial gravity are suspended.

Read it all from the NYTimes Dealbook.

The Obama administration is pushing eurozone leaders to compromise more with Athens as fears grow that a protracted stand-off could damage the global economy, say senior EU and US officials.

The US lobbying comes amid mounting concern in Brussels and Washington about the hardline stand taken by some eurozone governments, particularly Germany, that Greece must press on with budget-cutting commitments made under its existing €172bn bailout regardless of last month’s election, which brought anti-austerity party Syriza to power .

“This is a conversation we’re having with people,” said a senior US official involved in the talks.

“There isn’t a special initiative. I don’t think our attitude has changed but what’s changed is that suddenly the situation in Greece is looking more problematic.”

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It is easy to see why Syriza put debt repudiation at the heart of its electoral campaign. John Paul Getty once opined that “if you owe the bank $100, that’s your problem; if you owe the bank $100m, that’s the bank’s problem”. Greece’s predicament may ultimately force creditors to the negotiating table. To service its debt burden would require Greece to operate as a quasi slave economy, running a primary surplus of 5 per cent of GDP for years, purely for the benefit of its foreign creditors. Even the IMF has dropped hints in favour of some debt forgiveness.

But Greece’s EU creditors have equally strong reasons for refusing. Caving to Syriza’s demands would come at a high political cost, particularly for Germany’s Angela Merkel, who is harried by the eurosceptic AfD on her right. Other struggling countries would find their own radical parties emboldened by Syriza’s success. No country deserves to live beyond its means indefinitely.

Back in 2011, Greece posed an existential threat to the eurozone. Today, Berlin and Frankfurt are no longer as frightened by the prospect of Greece leaving the single currency. Yet for the Greek people this would be a catastrophe: a giant economic step backwards and a blow to living standards just as severe as any endured under austerity.

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The leader of the left-wing Syriza party Alexis Tsipras has said Greece is “leaving behind disastrous austerity”, after his party claimed victory in the country’s general election.

And the 40-year-old told jubilant supporters the “Troika” of the country’s lenders “is finished”.

He was speaking after the Greek Prime Minister Antonis Samaras, who heads the conservative New Democracy party, conceded defeat to Mr Tsipras.

Partial election results suggest Syriza has secured 36.5% of the vote, compared to 27.7% for the New Democracy party.

Read it all from Sky news.

The SNB was not forced to act by a speculative run. No financial crisis forced its hand, and, in theory, the SNB’s directorate could have held the exchange rate and bought foreign assets indefinitely. But domestic criticism of the SNB’s large buildup of exchange-rate reserves (euro assets) was mounting.

In particular, Swiss conservatives disliked the risk to which the SNB was exposed. Fearing that eurozone government bonds were unsafe, they agitated to require the SNB to acquire gold reserves instead, even forcing a referendum on the matter. Though the initiative to require a fixed share of gold reserves failed, the prospect of large-scale quantitative easing by the European Central Bank, together with the euro’s recent slide against the dollar, intensified the political pressure to abandon the peg.

Whereas economists have modeled financial attacks well, there has been little study of just when political pressure becomes unbearable and a central bank gives in. The SNB, for example, had proclaimed loyalty to the peg just days before ending it. As a result, markets will now hesitate to believe central banks’ statements about future policy, and forward guidance (a major post-crisis instrument) will be much more difficult.

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As 2015 begins, the global economy remains weak. The United States may be seeing signs of a strengthening recovery, but the eurozone risks following Japan into recession, and emerging markets worry that their export-led growth strategies have left them vulnerable to stagnation abroad. With few signs that this year will bring any improvement, policymakers would be wise to understand the factors underlying the global economy’s anemic performance ”“ and the implications of continued feebleness.

In the words of Christine Lagarde, the International Monetary Fund’s managing director, we are experiencing the “new mediocre.” The implication is that growth is unacceptably low relative to potential and that more can be done to lift it, especially given that some major economies are flirting with deflation.

Conventional policy advice urges innovative monetary interventions bearing an ever expanding array of acronyms, even as governments are admonished to spend on “obvious” needs such as infrastructure. The need for structural reforms is acknowledged, but they are typically deemed painful, and possibly growth-reducing in the short run. So the focus remains on monetary and fiscal stimulus ”“ and as much of it as possible, given the deadening effects of debt overhang.

And yet, the efficacy of such policy advice remains to be seen.

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The Swiss National Bank’s shock move today to stop intervening in the foreign exchange market all but guarantees the European Central Bank will finally introduce quantitative easing when it meets Jan. 22. Switzerland is surrendering before a wave of post-QE money fleeing the euro threatens to make a mockery of its currency policy. It’s also capitulating as slumping oil brings global deflation ever closer.

t’s an astonishing U-turn. Just two days ago SNB Vice President Jean-Pierre Danthine told Swiss broadcaster RTS that “we’re convinced that the cap on the franc must remain the pillar of our monetary policy.” He added, though, that it was “very possible” that QE would make defending the threshold more difficult. It seems highly probable that the ECB has winked about its policy intentions to its Swiss counterparts.

The ensuing whipsaw in the currency market is unprecedented. The franc immediately appreciated almost 30 percent against the currencies of the Group of Ten industrialized nations, and surged to a record against the euro…:

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An adviser to Europe’s top court on Wednesday said the European Central Bank can legally buy large quantities of eurozone government debt to stabilize the currency area’s economy, delivering a key endorsement for the bank as it prepares another round of stimulus measures.

The opinion from the European Court of Justice’s advocate general, Pedro Cruz Villalon, comes in response to a lawsuit brought by German opponents of loose monetary policy claiming that the ECB’s Outright Monetary Transactions program, announced in August 2012 and widely credited with saving the euro, violates the European Union treaty. While the opinion isn’t binding on the court, the judges usually follow the advocate general’s reasoning. A ruling is expected in four to six months.

A negative opinion could have thrown the ECB’s next stimulus efforts into turmoil. ECB President Mario Draghi and other officials have been drawing up “quantitative easing” plans, in which the bank would buy large amounts of eurozone government debt, to boost the economy of the 19-nation currency area and prevent an extended period of deflation, a broad-based decline in prices that can have disastrous economic consequences.

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…the ECB is split over whether to embark on full-blown quantitative easing as a way to achieve growth. Such a policy is strongly opposed by Bundesbank President Jens Weidmann and other hawkish members of the bank’s governing council.

They believe the central bank’s existing measures, which include buying covered bonds and asset-backed securities and auctioning cheap cash to eurozone lenders, are enough to lift inflation to the ECB’s target of below but close to 2 per cent.

But analysts think the disappointing take-up at Thursday’s auction has weakened their hand. “The result reduces the strength of the ECB hawks’ argument that existing policy measures are enough,” said Nick Matthews, economist at Nomura.

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German bond yields are to fall below Japanese levels and plumb depths never seen before in history as Europe becomes the epicentre of global deflationary forces, according to new forecast from the Royal Bank of Scotland.

“We are seeing `Japanification’ setting in across Europe,” said Andrew Roberts, the bank’s credit strategist. “We expect 10-year Bund yields to cross the 10-year Japanese government bond and we are amply positioned for such an outcome.”

Mr Roberts said it is a “weighty win-win” situation for investors. If the European Central Bank launches full-blown quantitative easing, it will almost certainly have to buy large amounts of German Bunds, and these are becoming scarce.

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The much heralded asset-backed securities purchase programme will only yield about €250bn-€450bn in assets over the next two years. More LTRO (or the newer targeted LTRO) will prove a challenge as sovereign bond yields in Europe are so low that a large balance sheet expansion through this means seems impractical. Perhaps there is another €500bn-€750bn to do over the next year or two. Outright purchases of sovereign debt would prove politically difficult, as many would interpret such purchases as violating the ECB’s mandate and the matter would probably end up in the European courts.

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policy makers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly.

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The world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan’s economy is struggling and China’s growth is now slower than at any time since 2009. Unpredictable dangers abound, particularly from the Ebola epidemic, which has killed thousands in West Africa and jangled nerves far beyond. But the biggest economic threat, by far, comes from continental Europe.

Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years. Its leaders have squandered two years of respite, granted by the pledge of Mario Draghi, the European Central Bank’s president, to do “whatever it takes” to save the single currency. The French and the Italians have dodged structural reforms, while the Germans have insisted on too much austerity. Prices are falling in eight European countries. The zone’s overall inflation rate has slipped to 0.3% and may well go into outright decline next year. A region that makes up almost a fifth of world output is marching towards stagnation and deflation.

Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the euro zone poses far greater risks. Unlike Japan, the euro zone is not an isolated case: from China to America inflation is worryingly low, and slipping.

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Huge expansions in credit followed by crises and attempts to manage the aftermath have become a feature of the world economy. Today the US and UK may be escaping from the crises that hit seven years ago. But the eurozone is mired in post-crisis stagnation and China is struggling with the debt it built up in its attempt to offset the loss of export earnings after the crisis hit in 2008.

Without an unsustainable credit boom somewhere, the world economy seems incapable of generating growth in demand sufficient to absorb potential supply. It looks like a law of the conservation of credit booms. Consider the past quarter century: a credit boom in Japan that collapsed after 1990; a credit boom in Asian emerging economies that collapsed in 1997; a credit boom in the north Atlantic economies that collapsed after 2007; and finally in China. Each is greeted as a new era of prosperity, to collapse into crisis and post-crisis malaise.

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Clemens Fuest, from the Mannheim-based organization best known for its widely-watched economic sentiment index – told German business daily Handelsblatt that the euro zone region could be at a “turning point.”

“I’ve got a bad feeling about this…I am concerned by the danger that the ECB is producing new bubbles with its policy of cheap money,” he told the newspaper.

“We have all the ingredients of a bubble: The prices of real estate and stock markets continue to rise, and on the bond markets, yields are falling despite high risks.”

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The European Central Bank cut its deposit rate below zero and said it would announce further measures later today as policy makers try to counter the prospect of deflation in the world’s second-largest economy.

ECB President Mario Draghi reduced the deposit rate to minus 0.10 percent from zero, making the institution the world’s first major central bank to use a negative rate. Policy makers also lowered the benchmark rate to 0.15 percent from 0.25 percent.

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The euro zone’s economy expanded at a weak pace last quarter despite a strong recovery in Germany, putting added pressure on the European Central Bank to enact fresh easing measures to prevent the region from sliding into a lengthy period of low inflation and economic stagnation.

Gross domestic product grew 0.2% in the euro zone during the first quarter compared with the final three months of 2013, the European Union’s statistics agency Eurostat said Thursday, well short of the 0.4% quarterly gain expected by economists.

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A leading German institute has called for full-blown quantitative easing by the European Central Bank (ECB) to head off a deflation spiral, marking a radical shift in thinking among the German policy elites.

Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, demanded €60bn (£50bn) of bond purchases each month to halt the contraction of credit and avert a Japanese-style trap.

“It is high time for the ECB to act. Otherwise Europe risks falling into a dangerous downward spiral of sliding prices and declining demand”, he wrote in Die Welt.

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To help money flow more evenly across the currency area, Coeure said the idea of cutting into negative territory the rate the ECB pays banks to hold their deposits overnight was “a very possible option”.

“That is something we are considering very seriously. But you should not expect too much of it,” he said of a negative deposit rate.

The ECB left policy on hold last week but President Mario Draghi put markets on alert for possible action in March, saying the Governing Council would have more information at its disposal by then, including new forecasts from the bank’s staff that will extend into 2016 for the first time.

Read it all from Reuters.

Standard and Poor’s (S&P) has cut France’s credit rating to AA from AA+.

The moves comes almost two years after the country lost its top-rated AAA status….

S&P said in its statement: “We believe the French government’s reforms to taxation, as well as to product, services and labour markets, will not substantially raise France’s medium-term growth prospects and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures.”

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A senior Chinese official has warned that the “clock is ticking” to avoid a US default that could hurt China’s interests and the global economy.

China, the US’s largest creditor, is “naturally concerned about developments in the US fiscal cliff”, vice finance minister Zhu Guangyao said.

Washington must agree a deal to raise its borrowing limit by 17 October, or risk being unable to pay its bills.

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Angela Merkel won a landslide personal victory in Germany’s general election on Sunday, but her conservatives appeared just short of the votes needed to rule on their own and may have to convince leftist rivals to join a coalition government.

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Ever since the euro crisis broke in late 2009 this newspaper has criticised the world’s most powerful woman. We disagreed with Angela Merkel’s needlessly austere medicine: the continent’s recession has been unnecessarily long and brutal as a result. We wanted the chancellor to shrug off her cautious incrementalism and the mantle of her country’s history””and to lead Europe more forcefully. She is largely to blame for the failure to create a full banking union for the euro zone, the first of many institutional changes it still needs. She has refused to lead public opinion, never spelling out to her voters how much Germany is to blame for the euro mess (nor how much its banks have been rescued by its bail-outs). We also worry that she has not done enough at home: in recent years no country in the European Union has made fewer structural reforms, and her energy policies have landed Germany with high subsidies for renewables and high electricity prices.

And yet we believe Mrs Merkel is the right person to lead her country and thus Europe. That is partly because of what she is: the world’s most politically gifted democrat and a far safer bet than her leftist opponents. It is also partly because of what we believe she could still become””the great leader Germany and Europe so desperately needs.

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Since the euro crisis began, many governments across Europe have been swept from power. France last year saw a presidential campaign heavily focused on Europe, and calls for alternatives to austerity have grown ever louder. So why is it that Germany, the country key to solving the euro crisis, seems immune to this polarization of views on the future of economic and monetary union?

Partly it has to do with the Greens and the Social Democrats, two opposition parties struggling to differentiate their euro policies from Merkel’s government, a coalition of her conservatives and the business friendly Free Democrats (FDP). Both the Greens and the SPD have supported all major euro rescue measures thus far. Even the Left Party, a stronger critic of the government, recently confirmed its overall commitment to the common currency. There is currently no anti-euro party in Germany parliament, with newcomers such as the euro-skeptic Alternative for Germany, media attention notwithstanding, yet to demonstrate their potential at the ballot box.

One reason is that Germans are still not feeling the pinch of the crisis. On the contrary, they continue to hear good news about strong exports, lower unemployment and economic growth. With the election looming, it is no surprise that the Merkel administration is wary of spoiling this mood of complacency by addressing the downsides of the “German model” for fellow euro-zone member states.

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Two more Portuguese ministers from the junior ruling coalition party were ready to resign on Wednesday, local media said, deepening turmoil that could trigger a snap election and derail Lisbon’s exit from an EU/IMF bailout.

Multiple newspaper radio and television reports said Agriculture Minister Assuncao Cristas and Social Security Minister Pedro Mota Soares will follow their CDS-PP party leader Paulo Portas who tendered his resignation on Tuesday. Party officials were not available to comment as the party’s executive commission was in a meeting.

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In the thirty or so years that I have been following EU affairs ”“ or is it nearer 35 years now since I studied in French literature in Paris, and German philosophy in Mainz ”“ I have never seen ties between Europe’s two great land states reduced so low.

The French Socialist Party crossed a line by lashing out at Chancellor Angela Merkel in person. It is one thing to protest “German austerity”, it is quite another to rebuke the “selfish intransigence of Mrs Merkel, who thinks of nothing but the deposits of German savers, the trade balance recorded by Berlin and her electoral future”.

There is no justification for such an ad hominem attack. German policy is indeed destructive, but that is structural. It is built into the mechanisms of EMU and the anthropological make-up of the enterprise.

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Culture change in financial services will not be achieved by “light touch” or “heavy touch” regulation, Archbishop Justin said at a Westminster discussion organised by the Bible Society.

Instead the banking sector must adopt “an aim of service to society and not mere rent-seeking, and a culture of virtue based in the realities of daily life and not a fantasy nirvana,” he said.

Describing what this change of culture might look like, the Archbishop said it would require “a ruthless honesty and a deep willingness to be made very uncomfortable indeed through listening to things one does not want to hear”.

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We have no way of knowing how this all ends. One problem is that the smartest solution””having Germany and perhaps a handful of other northern countries leave the euro for a new currency (the Deutche Mark 2.0, or a “neuro” for northern Europe)””would make life easier in the south. The south based euro would fall in value, but since debts and contracts are denominated in that currency, the adjustment would be the same as in a normal devaluation. This course would likely lead quickly to a new burst of growth in the south, though inflation and other problems would take a toll over time.

But the euro’s break up day would cause a lot of problems for Germany and its northern friends….

So we’re in an interesting situation. The crisis is crippling the south, but the south has no power to resolve the crisis. The crisis isn’t comfortable for the north but still looks less painful than the solution. So the north, which has the ability to resolve the crisis, doesn’t have the will to do it and the south, which has the will, lacks the ability.

Read it all (and please note that the Financial Times article by Wolfgang Münchau which is mentioned, entitled “The riddle of Europe’s single currency with many values,” is indeed a must read as Mr. Read says).

Basically, she outlined the problems with the euro perfectly, that Germany would chafe at the inevitable need for greater inflation, and that the poorer countries would inevitably be uncompetitive and need bailouts that would not easily be forthcoming.

This paragraph is from “The Path To Power,” where she discusses conversations with John Major (her successor) about negotiating with the rest of Europe. She just totally nails the inflation and competitiveness angles….

Read it all.