World Economic Woes

EU leader condemns US ‘road to hell’
By Tony Barber in Brussels and Edward Luce in Washington
Copyright The Financial Times Limited 2009
Published: March 25 2009 20:00 | Last updated: March 26 2009 00:12
http://www.ft.com/cms/s/0/1d3fa8fa-1975-11de-9d34-0000779fd2ac.html


European Union hopes for a new era in relations with the US were thrown into chaos on Wednesday when the holder of the EU presidency condemned American remedies for the global recession as “the road to hell”.

Barely a week before Barack Obama is due to arrive in Europe on his first official visit as US president, Mirek Topolanek, the Czech Republic’s prime minister, put the 27-nation EU on a collision course with Washington.

His attack compounded the confusion that has engulfed EU policy after the Czech leader lost a no-confidence vote in the country’s parliament on Tuesday, forcing him to offer his government’s resignation midway through its six-month EU presidency.

Mr Topolanek said EU leaders had been disturbed at a summit in Brussels last week to hear calls from Tim Geithner, the US Treasury secretary, for more aggressive policies to fight the global downturn.

“The US Treasury secretary talks about permanent action and we, at our spring council, were quite alarmed at that . . . The US is repeating mistakes from the 1930s, such as wide-ranging stimuluses, protectionist tendencies and appeals, the Buy American campaign, and so on,” he told a European parliament session in Strasbourg. “All these steps, their combination and their permanency, are the road to hell.”

US officials made no comment on the remarks. But the Obama administration says it took great pains to ensure that the Buy American provisions in the $787bn (€579bn) stimulus that the president signed into law last month were consistent with World Trade Organisation rules. It followed, therefore, that any attempt to make them permanent would continue to be consistent with WTO rules.

EU diplomats said it was the most extraordinary outburst from a political leader in charge of running the EU’s affairs since Silvio Berlusconi, Italy’s prime minister, caused uproar in 2003 when he likened a German socialist member of the European parliament to a Nazi concentration camp guard.

Other leaders of EU member states, including Angela Merkel, Germany’s chancellor, disagree with US calls for big fiscal stimuli to battle the recession. But they have couched their opposition in more diplomatic language than Mr Topolanek’s.

The Czech leader was speaking eight days before Mr Obama was due to arrive in London for a G20 summit of the world’s developed and emerging economies.

After the summit and a Nato meeting in France and Germany, the US president is due to fly to Prague for an EU-US summit, at which the Czech Republic will represent all 27 member states.

Relations between the Obama administration and Mr Topolanek’s government have been delicate in recent weeks because of signals from Washington that Mr Obama may reassess plans to deploy parts of a US anti-missile shield in the Czech Republic, a project to which the Topolanek government has been committed.

Mr Obama has vigorously opposed the view that the Great Depression was caused by too much spending, rather than too little, a view held by a small handful of rightwing economists.






Europe needs a better plan for its banks
By Wolfgang Münchau
Copyright The Financial Times Limited 2009
Published: March 22 2009 18:08 | Last updated: March 22 2009 18:08
http://www.ft.com/cms/s/0/95c99be4-170b-11de-9a72-0000779fd2ac.html


This is not a crisis that will be solved by central bankers. Its length and depth, and the shape of the recovery, will depend almost entirely on how fast we can sort out the banking sector. On that front, the news is not good on either side of the Atlantic.

Maybe that will improve when Tim Geithner, US Treasury secretary, announces the details of his bank rescue plan this week. Judging by his statements so far, I am not hopeful.

Last week’s irrational outbreak of optimism in the financial markets appears premature. The Federal Reserve decided to buy long-term bonds, mortgage-backed securities, and other assets with the goal of lowering effective long-term interest rates for households. But I doubt some of the optimistic projections of how much these purchases will affect real-world mortgage rates.

There are counteracting forces at work that may keep long-term rates high. Those include an evaporation of foreign demand for several classes of US securities and an increasing number of investors who react allergically to the word “trillion” when it is applied to rising federal deficits – rightly or wrongly, they fear inflation will result from current economic policies.

One of the most frequently asked questions is whether the European Central Bank should follow the Fed into quantitative easing. The good news is that the ECB has already adopted a zero interest rate policy. It has done so after some delay and not in a particularly transparent way. The official interest rate is still 1.5 per cent – but this so-called benchmark rate does not tell us what is happening on the ground. Overnight interest rates in the eurozone are now not much higher than in the US. The ECB has achieved this trick through a clever shift in its liquidity policies.

I also suspect that the ECB will follow the Fed and expand its balance sheet further. Two years ago, the ECB’s balance sheet totalled €1,120bn. Now it is €1,830bn ($2,485bn, £1,715bn). This is unlikely to be the end of the process. The structure of the eurozone’s financial system is a little different, however, and the response will vary accordingly.

The Fed has been pursuing a policy that works through the asset side of its balance sheet. By buying mortgage-backed securities, for example, it hopes to improve the availability of mortgages and to reduce mortgage rates. In the eurozone, long-term mortgage rates are not the big issue they are in the US. But the ECB could, for example, buy up the underpriced bonds of various eurozone governments that have recently been subject to speculative attacks.

Snapping up some of this paper would boost its balance sheet while helping to stabilise European bond markets. I would not be surprised if the central bank even made a profit from such an operation.

The euro’s exchange rate is meanwhile shooting through the roof. If this persists, it will almost certainly delay the economic recovery. I am loath to forecast exchange rates but an extended period of dollar weakness may be both necessary and desirable. But the prospect of an overshooting exchange rate in conjunction with a slowdown in global demand requires a much more assertive policy response than the complacent display put on by leaders during last week’s European Union summit would suggest.

The ECB will clearly come under pressure to do more, as monetary conditions in the eurozone are growing tighter. As European leaders focus on tax havens and hedge funds, it is hard to detect a sense of urgency in dealing with the wider crisis. They seem to think that they did enough last October, when they issued blanket guarantees on bank debt and offered voluntary recapitalisation schemes.

Against this backdrop, the effectiveness of central bank policy, however well executed, is limited. What has to happen is for governments to rethink, relaunch and co-ordinate their bank rescue strategies. It is important that these strategies are not only transparent but comprehensive. Participation should not be voluntary. In Germany, for example, the cap on salaries for bankers whose banks receive financial aid has provided a powerful incentive not to take up government funds. The US Congress should study this example carefully.

It is not necessary that all governments pursue the same strategy. A state-owned “bad bank” that takes on toxic assets in exchange for injecting equity is a frequently mentioned possibility. My preference would be for a state-owned “good bank”, similar to the plan proposed by Willem Buiter from the London School of Economics, which is more likely to lead to a fundamental clean-up of the banking sector.

But we should not get bogged down in technical minutiae. The important thing is that countries choose one of the plausible alternatives and implement it soon. Partial nationalisation of the banking system may be part of that process but any nationalisation should be regarded as a means to an end. What matters is new capital and restructuring.

Quantitative easing may be cool. But it should not be the main priority right now.

Send your comments to munchau@eurointelligence.com

More columns at www.ft.com/wolfgangmunchau




Barclays stress test signals no new funds
By George Parker and Jane Croft
Copyright The Financial Times Limited 2009
Published: March 26 2009 23:30 | Last updated: March 27 2009 11:23
http://www.ft.com/cms/s/0/52f0ac48-1a4b-11de-9f91-0000779fd2ac.html


Barclays’ loan book is in the final stages of an extreme stress test by City regulators as it weighs up whether it needs to seek taxpayer help by joining the government’s insurance scheme, which ringfences toxic assets.

The Financial Times has learnt that the Financial Services Authority will conclude its detailed trawl through the bank’s books in the next few days and it has indicated that Barclays does not need any fresh capital.

However, there are some analysts who predict that Barclays might need a large dose of fresh capital to weather the downturn.

Shares in Barclays rose as much as 12 per cent on Friday morning, adding to the 13.5 per cent gain made during the previous session, but later retraced some of that advance to stand 7 per cent higher at 149.9p. The shares have now almost tripled since hitting a low of 55p earlier this month.

Barclays faces the tough decision to be taken by next Tuesday on whether to accept government help through the Treasury’s toxic asset insurance scheme or try to stay free of government interference.

The government has set a deadline of March 31 to apply for the scheme.

Barclays is close to the sale of iShares, the fast-growing asset management business that could fetch up to $6.5bn (£4.5bn). This would help bolster its capital ratios.

Lord Turner, FSA chairman, is overseeing the stress test, designed to ensure a bank could survive a severe economic downturn. Insiders have jokingly described this as the “cans and candles” test.

Lloyds and Royal Bank of Scotland both saw their loan books undergo the same stress-testing before they took part in the government’s insurance scheme and both ended up handing big new shareholdings in the bank to the taxpayer.

Lord Turner and Alistair Darling, chancellor, want to assure themselves that if Barclays decides not to join the asset protection scheme, it will not be forced into seeking emergency help a few months later.

Barclays has so far avoided taking capital from the government and raised £7bn last year, mostly from Middle Eastern investors.

Under the terms of the Treasury scheme, Barclays would be subject to controls on pay and bonuses. The bank has said it already has strong capital ratios but it believes that in the current climate, banks cannot have too much capital.

If Barclays joins the scheme, some analysts say it would be hard to avoid the government taking a stake in the bank, although Barclays could decide to pay its insurance fee in cash.

Barclays is talking to at least three parties about iShares, including Goldman Sachs and Bain Capital, and it is likely to provide some financing to the winning bidder.

Jonathan Pierce, analyst at Credit Suisse, said Barclays did not need as much capital as RBS or Lloyds.







Irish economy plunges deeper into recession
© Reuters Limited
March 26, 2009
http://www.ft.com/cms/s/0/97dc768a-1a04-11de-9f91-0000779fd2ac.html


DUBLIN, March 26 - Ireland’s economy plunged deeper into recession in the final quarter of 2008 with the worst full-year performance in 25 years, setting the stage for an even bleaker 2009 than originally feared.

Gross domestic product (GDP) fell 7.5 percent from the same period a year ago, far worse than even the most pessimistic forecast in a Reuters poll, as consumers and businesses put the brakes down hard on spending.

”We have now moved into 2009 with even stronger headwinds than we thought,” said Dan McLaughlin, chief economist at Bank of Ireland.

”You’ll probably see further downward revisions (in 2009 consensus forecasts) on the back of this.”

GDP fell 2.3 percent for the whole of 2008, data from the Central Statistics Office showed on Thursday -- far lower than the 1.5 percent decline forecast in a Reuters poll and the weakest level since 1983.

Economists had forecast fourth quarter GDP would drop by 2.9 percent. The lowest estimate in the Reuters poll was for a fall of 6.1 per cent.

The government has already downgraded its forecast for this year’s contraction to 6.5 percent from 4.5 percent, already predicted to be the worst recession on record as the former ”Celtic Tiger” economy suffers from the double whammy of a global recession and a collapsing local property bubble.

The rapidly deteriorating economy has sent tax revenues nose-diving and the government is set to hike taxes and slash spending on April 7, in its second emergency budget in six months.

Gross National Product (GNP) fell 6.7 percent in the fourth quarter from a year ago, worse than expectations for a 3.9 percent fall.

GNP is the government’s favoured measure of the domestic economy because it excludes profits earned by multinational companies which have a big presence in Ireland.







Two European banks report good start to '09
Copyright by Reuters
Published: March 24, 2009
http://www.iht.com/articles/2009/03/24/business/banks.php


LONDON: Deutsche Bank and Credit Suisse Group said Tuesday that 2009 had started well after they posted losses last year and cut the compensation of their chief executive officers by about 90 percent.

Josef Ackermann, Deutsche Bank's chief executive., said Germany's biggest bank had had a "good start" to the year and expected to return to profitability after having scaled back risky businesses and shed toxic assets. Credit Suisse, Switzerland's second-biggest bank, had a strong start to the year, the Zurich-based company said in its annual report, adding that it might raise funds for acquisitions

The comments came after Bank of America, JPMorgan Chase and Citigroup said they had been profitable in the first two months of the year, bolstering banking shares in the past two weeks. While Deutsche Bank and Credit Suisse both reported record fourth-quarter losses, they have avoided taking government bailouts.

"Deutsche Bank and Credit Suisse have fared relatively well compared to many of their rivals," said Manfred Jakob, a Frankfurt-based analyst at SEB. "Now the main question is how they will do in terms of write-downs and sustainable earnings."

Ian Gordon, analyst at Exane BNP Paribas, said, "We've seen one or two months of relatively better investment banking revenues, which have given a lift to some names, but nothing has fundamentally changed for the better in terms of the macro outlook.".

Chief executives from European, United States and Asian banks were meeting Tuesday in London with Prime Minister Gordon Brown of Britain and were expected to discuss how to revive the global economy, as well as capital adequacy, regulatory reform and accounting consistency.

Chief executives attending are expected to include Ackermann; Alfredo Saenz of Santander; Baudouin Prot of BNP Paribas; John Varley of Barclays; and Peter Sands of Standard Chartered; as well as Bill Winters, co-head of investment banking at JPMorgan Chase.

Ackermann said he expected banks to face significant challenges this year but that there was a good chance the industry would recover at least partially in 2010. In the bank's annual report, he said there was no need for the bank to raise capital.

Both Deutsche Bank and Credit Suisse revealed that their chief executives had felt the impact of the credit crunch in their wallets.

Deutsche Bank said Ackermann's pay package had dipped to €1.4 million, or $1.9 million, last year from €14 million in 2007. Credit Suisse said its chief executive, Brady Dougan, had received total pay of 2.86 million francs, or $2.53 million, last year, down from 22.28 million francs in 2007.

Deutsche Bank and Credit Suisse have benefited from a rebound in Europe's corporate bond market this year, with sales surpassing €100 billion, the quickest issuance has reached that level.

The German company forecast "some degree of recovery" in the banking industry in 2010 because of government and central bank aid, a "gradual recovery" in the global economy and "gradual stabilization" of the United States real estate market.

Deutsche Bank announced a record €4.8 billion net loss in February for the fourth quarter and its first annual deficit in more than 50 years. Credit Suisse had a net loss of 6.02 billion francs in the fourth quarter.

The German and Swiss banks skirted the worst of the United States subprime mortgage crash that contributed to more than $1.2 trillion in credit losses and write-downs at the world's largest financial companies.

The German bank has booked about €9.3 billion in markdowns since the outbreak of the United States subprime mortgage crisis in 2007. UBS in Zürich has had $50.6 billion of markdowns, and New York-based Citigroup $88.3 billion, according to data compiled by Bloomberg.






Eurozone businesses report rosier outlook
By Ralph Atkins in Frankfurt
Copyright The Financial Times Limited 2009
Published: March 24 2009 11:15 | Last updated: March 24 2009 11:15
http://www.ft.com/cms/s/0/ae67a19a-1860-11de-bec8-0000779fd2ac.html


Glimmers of hope emerged on Tuesday suggesting that the rapid pace of the eurozone's economic contraction has eased this month, with businesses reporting conditions are less gloomy than feared.

The eurozone purchasing managers’ indices, which offer a guide to future activity trends, rose unexpectedly in March, suggesting the headlong plunge in recent months could be coming to an end.

However, the indices still pointed to private-sector activity contracting for the 10th consecutive month and indicated that the eurozone’s economic performance in the first quarter of this year was the weakest since the survey began in 1998.

“Gross domestic product could have fallen in the first quarter by even more than the 1.5 per cent drop seen in the final quarter of last year,” said Chris Williamson, chief economist at Markit, the research company that produces the survey.

With the economy still contracting, the European Central Bank is expected to announce further stimulus measures in coming weeks and months. Erkki Liikanen, Finland’s central bank governor, said “room for manoeuvre” remained on all the main ECB interest rates. That suggested he would back a further cut in the deposit facility rate, which has already been cut to 0.5 per cent and has become an important benchmark for market interest rates.

The ECB’s main policy rate is 1.5 per cent, its lowest ever, but could be cut in April or May. Signs have emerged that the ECB could, in addition, offer banks unlimited liquidity for nine or 12 months – rather than the current maximum of six months – adding to the downward pressure on longer term interest rates.

The eurozone fell into recession last year, even before the failure of Lehman Brothers in mid-September. But the precipitous fall in industrial production late last year and early in 2009, triggered by the collapse in confidence in the financial system, has led economists to dramatically downgrade forecasts for the eurozone prospects.

Export-dependent Germany has been particularly badly hit – and is widely expected by economists to contract by 5 per cent or more this year.

In its latest forecasts, the BGA German exporters’ association forecast the country’s exports would fall by up to 15 per cent this year, although Anton Börner, BGA president, saw a “good chance” of Germany retaining its leading position because China and Japan had also seen a collapse in exports.

Mr Williamson at Markit said the purchasing managers' indices provided “some rays of hope”. Service sector companies reported a rebound in confidence in March, while manufacturers saw a record fall in unsold stock and a slower pace of decline in new orders. That pointed to “some further moderation in the pace of contraction of manufacturing output in coming months”.

The composite eurozone index, cover manufacturing and services, rose from the record low of 36.2 in February to 37.6 in March. A figure below 50 is consistent with a contraction in activity. The biggest increase was in the service index, which rose from 39.2 to 40.1. The manufacturing purchasing managers’ index rose more modestly, from 33.5 to 34.






Sweden says no to saving Saab
By Sarah Lyall
Copyright by The International Herald Tribune
Published: March 23, 2009
http://www.iht.com/articles/2009/03/23/europe/23saab.php



TROLLHATTAN, Sweden: Saab Automobile may be just another crisis-ridden car company in an industry full of them. But just as the fortunes of Flint, Michigan, are permanently entangled with General Motors, so it is impossible to find anyone in this city in southwest Sweden who is not somehow connected to Saab.

Which makes it all the more wrenching that the Swedish government has responded to Saab's desperate financial situation by saying, essentially, tough luck. Or, as the enterprise minister, Maud Olofsson, put it recently, "The Swedish state is not prepared to own car factories."

Such a view might seem jarring, coming as it does from a country with a reputation for a paternalistic view of workers and companies. The "Swedish model" for dealing with a banking crisis — nationalizing the banks, recapitalizing them and selling them — has been much debated lately in the United States, with free-market defenders warning of a slippery slope of Nordic socialism.

But Sweden has a right-leaning government, elected in 2006 after a long period of Social Democratic rule, that prefers market forces to state intervention and ownership. That fact has made the workers of Trollhattan wish the old socialist model were more in evidence.

"I don't think the government knows the situation in this town, how many people depend on Saab," said Therese Doeij, 25, a clerk at a photo shop who has several friends who work at the company. "To them it's just a factory. They don't see the people behind it."

Governments all over the world are confronting the disintegration of the global automobile market in different ways, with loans, bailouts and takeovers.

But Sweden's approach has been particularly hard-nosed, and particularly unequivocal.

Why is the government apparently dead set against helping Saab, an iconic brand that stands as a global symbol of Sweden, with Ikea, Volvo and Abba?

That is what Paul Akerlund, the local chairman of the automobile workers' union, wonders.

"I'm a little surprised," he said. "They say the market should help itself, but the market has collapsed around the whole world. It's an extraordinary situation."

He added, with a note of accusation in his voice, "In Germany, France and England, the government is going in to help the car manufacturers."

Swedish officials have condemned what they see as protectionism by other European countries that have pledged to prop up their own failing car industries. They have also been scathing about General Motors, Saab's owner, and the last thing they want is to seem to be bailing out a despised foreign company.

Struggling for its own survival, G.M. has said it will completely pull out of Saab by the end of 2009, a course that Ms. Olofsson, the enterprise minister, described as tantamount to declaring "that they wash their hands of Saab and drop it into the laps of the Swedish taxpayers."

She said: "We are very disappointed in G.M., but we are not prepared to risk taxpayers' money. This is not a game of Monopoly."

Saab lost about $343 million last year. It is now going through a Swedish process known as reorganization, a step short of bankruptcy, as it tries to persuade its creditors to prop it up while it looks for a buyer. Joe Oliver, a spokesman, said in an interview that "around six serious investors," from Sweden and abroad, had expressed interest.

Time is running out.

But the prospect of failure is too awful for Trollhattan's mayor, Gert-Inge Andersson, to even contemplate. In a city of about 54,000 people, Saab employs 4,000.

"I'm being optimistic, because I can't envision a time when Saab doesn't exist," Mr. Andersson said in an interview in City Hall.

His son worked at Saab for a decade; his daughter's boyfriend works there now. "Saab is our identity," he said. "We have lived with it for many years, and it's very important to all of us."

Saab was always known for its innovative engineering. But analysts say that in recent years, with General Motors's emphasis on volume rather than individuality, it has lost its edge.

"Under G.M.'s ownership, they denuded the intellectual content behind the brand," said Peter Wells, who teaches at Cardiff Business School in Wales and specializes in the automotive industry. "Its products are not exciting enough, and Saab doesn't have a strong brand identity anymore."

The numbers speak all too loudly. Saab sold just 93,295 vehicles worldwide last year, 21,383 of them in the United States. As global demand plummets, the expectations for this year are even more dire. The company announced this month that it planned to lay off 750 workers in Trollhattan.

This is not a rich city. Besides Saab, the largest employer is the municipal government. The houses run mostly to modest wooden two-story structures and low-rise brick apartment buildings. But about 40 percent of the people here drive Saabs, Mayor Andersson said. On a cold evening last month, 3,000 people held a torchlight ceremony to show their support for the company.

Leave the tourist office and you come immediately to the Saab Museum. A shining, sparkling valentine to a company and an industry, it features treasures like the groundbreaking turbo engine unveiled at the 1977 Frankfurt automobile show, and the prototype of the very first Saab car, from 1947 — Ur-Saab, its license plate says proudly. All the cars here, even the rarest and most precious, are still driven from time to time by enthusiasts.

Some 50,000 tourists visit each year, said Ola Bolander, who works at the museum. Saab sponsors a festival for its fans every other year; 20,000 came to the last one, in 2007. "Saab has always been a bit different, a bit more interesting," Mr. Bolander said. "It's gone its own way, and it's in the heart of the Swedish people."

Sweden has nine million people. Labor leaders say Saab's collapse would disproportionately affect southwest Sweden, an industrial belt that is also home to Volvo. But it would reverberate through the rest of the economy, which depends heavily on industrial exports, jeopardizing perhaps tens of thousands of jobs.

Sweden is famous for its generous unemployment provisions, which include retraining for laid-off workers. But unemployment is quickly rising. Tomas Eneroth, a member of Parliament and the spokesman for industry and trade for the opposition Social Democrats, said the government's tough line was foolish.

"The fact that they are so passive," he said, "is every day now making it worse and jeopardizing the possibility of having Saab still in Sweden."

Around the corner from City Hall, Johann Riden, a sales clerk in an electronics store, said about half his customers worked either at Saab or at companies that do business with Saab.

"I have friends there, my colleagues have family there, and my friends have family there," said Mr. Riden, 32. "If you look around, you see Saab everywhere." Next Article in World (2 of 26) » A version of this article appeared in print on March 23, 2009, on page A1 of the New York edition.





Czech currency falls on vote against PM
By Jan Cienski in Warsaw and Nikki Tait in Strasbourg
Copyright The Financial Times Limited 2009
Published: March 24 2009 22:41 | Last updated: March 25 2009 14:46
http://www.ft.com/cms/s/0/993d26b0-18c3-11de-bec8-0000779fd2ac.html


The Czech koruna lost ground on Wednesday after the country’s government collapsed after losing a vote of confidence over its handling of the economic crisis.

Tuesday’s 101-96 vote marked the end of the coalition government of Mirek Topolanek, the centre-right prime minister, as well as the effective conclusion of the already bumpy and crisis-ridden Czech presidency of the European Union, which formally expires on June 30.

In what would otherwise have been branded a routine gaffe, Mr Topolanek, now caretaker prime minister, said in Brussels on Wednesday that the US was on the “road to hell” with protectionist steps that threaten to deepen the global economic crisis.

“How can a government which has no support in the country be able to lead the European Union?” said Jiri Pehe, a Prague-based political scientist.

The Czech koruna fell 0.8 per cent to Kc27.293 against the euro and dropped 0.3 per cent to Kc20.165 against the dollar.

Mr Topolanek said he planned to resign after returning from Brussels but insisted in a newspaper interview that he should lead any new government. Jiri Paroubek, leader of the opposition Social Democrats, has said that he will push for fresh elections only after the Czech Republic’s current presidency of the EU expires.

The EU tried to put the best face possible on the embarrassing failure of the government leading the union, issuing a statement that said: “It is for the Czech Republic’s democratic process under the constitution to resolve the domestic political issues; the Commission is confident that this is done in a way which ensures the full functioning of the council presidency.”

The unexpected fall of Mr Topolanek’s government adds strength to the French argument that the presidency of a 27-member union that forms the world’s largest economy is unsuited for smaller and ill-prepared countries.

His government’s fall came ahead of a visit to Prague next month by Barack Obama, US president and on the eve of a weekend meeting of EU foreign ministers.

Mr Topolanek, facing the fifth vote of confidence in his third year as prime minister, was unable to win over enough independent MPs to save his government.

The initiative now passes to Vaclav Klaus, the euro-sceptic Czech president, who will have to name a caretaker administration to govern the country. If three attempts to form a new government fail, then new elections are called.

The difficulty in forcing new elections raises the possibility that a technocratic government will limp along in power until the next election, set for June 2010.

The opposition Social Democrats currently lead Mr Topolanek’s Civic Democrats (ODS) in opinion polls.

That would leave Prague ill-prepared to deal with the fall-out from the economic downturn, which is hitting the export-orientated Czech economy with increasing force. In a recent interview with the Financial Times, Zdenek Tuma, the governor of the Czech central bank, said the economy could shrink by as much as 2 per cent this year if the situation did not improve in western Europe.

Mr Topolanek had resisted calls to increase spending, arguing that the government did not have the wherewithal to bail the country out of the recession. However, that approach was unpopular with the left-leaning Social Democrats, and helped galvanise opposition.

The final straw was a domestic political scandal relating to accusations of inappropriate pressure to force a television station to stop a story criticising an opposition MP who had joined the government side.




Aided by Safety Nets, Europe Resists Stimulus Push
By NICHOLAS KULISH
Copyright by The New York Times
Published: March 26, 2009
http://www.nytimes.com/2009/03/27/world/europe/27germany.html?_r=1&hp


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.








Japan suffers record export drop
By Mure Dickie in Tokyo
Copyright The Financial Times Limited 2009
Published: March 25 2009 03:15 | Last updated: March 25 2009 14:02
http://www.ft.com/cms/s/0/36020dd2-18ea-11de-bec8-0000779fd2ac.html


Japanese exports fell by nearly half year-on-year in February, setting the latest in a series of grim records that have underscored the woes surrounding the world’s second largest economy.

The dismal February trade performance will fuel expectations that Japan is on course to experience a dramatic contraction in gross domestic product in the first three months of 2009, possibly matching or even exceeding the 3.2 per cent quarter-on-quarter decline recorded last quarter.

Japan, highly dependent on exports for growth, did manage to achieve a small trade surplus of Y82.4bn last month, after suffering a record deficit of over Y950bn in January.

However, it did so only because of a record 43 per cent fall in imports to Y3,443bn that highlighted the nation’s rapidly weakening appetite for raw materials for its increasingly idle factories and weak demand from consumers.

The imports slump and return to trade surplus will disappoint those who hope that Japan will be able to play a role as a new source of demand for crisis-hit structural importers such as the US.

“The fall in imports, in part, reflects lower commodity prices and the impact of the stronger yen. But it also reflects collapsing domestic demand,” Daiwa Securities said.

Domestic sentiment in Japan continued to be hurt by tumbling sales by the nation’s world-beating electronics and automobile exporters. Exports fell 49.4 per cent year-on-year to Y3,525bn, their worst performance since Japan began keeping comparable trade statistics in 1980.

Matt Robinson, economist at Moody's Economy.com, said US and European demand was likely to remain subdued for some time.

“It is difficult to see when and how the appalling trade results will start improving,” Mr Robinson wrote in a research note. “This will weigh heavily on GDP growth during the global recovery period, meaning Japan could lag the rest of the world considerably in recovering to its potential growth rate.”

Indeed, Japanese officials fret that deepening recessions in key markets could prompt a raft of new protectionist measures that would further hobble exporters already hampered by the strength of the yen.

To ease the slump, Tokyo is moving to try to boost domestic demand, with Taro Aso, prime minister, ordering officials to draw up a fiscal stimulus package for enactment early in the fiscal year starting next month.

Kaoru Yosano, minister for finance and economic policy, said at the weekend that calls for the package to be worth about Y20,000bn appeared reasonable.

The government has already implemented or approved fiscal stimulus measures equivalent to nearly 2 per cent of annual GDP and officials worry about the effect of greater spending on Japan’s already extraordinary debt burden.

However, critics say the government and Bank of Japan must take more aggressive steps to combat a slump of increasingly historic proportions.

“With domestic demand also weakening, the Japanese economy is…in for a very tough time through the remainder of this year,” said Grant Lewis of Daiwa Securities. “Against this backdrop, the policy response from the authorities continues to look woefully inadequate.”

With additional reporting by Michiyo Nakamoto