JUNE 2011 |
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A cracked-up Euro is coming Best of the Blogs
BEST OF THE BLOGS | 25 to come, are premised on the notion that the troubled countries are having a
liquidity problem, and a bit of cash will enable them to get back on their feet and repay their debts in full and on time. It is now clear that these countries are not merely illiquid but are insolvent, and that they will one way or another have to renege on their debts, at least in part. There’s more, but you get the idea: These countries are bankrupt and will have
to default on their debts … or “restructure” them, to use the term spoken in polite European circles. Such a default would be no trivial event for creditors: Estimates are that it would take a “haircut”—a write-down—of 40% to 70% to get debt into repayable territory. A “messy euro debt implosion . . . not only would . . . hurt the euro, it also has the potential to derail the global recovery,” conclude economists at Fathom Consulting. We might end up with a euro-nord and euro-sud, as Martin Feldstein once suggested. Such a distinction, rooted in diff erences between the stronger and weaker economies and banking sectors, would allow Greece and -others to do what the team of Obama and Bernanke seem to be planning: get rid of all those annoying debts by paying them off in a depreciated currency. Irwin M. Stelzer is a contributing editor to The Weekly Standard, the
director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
By Irwin M Stelzer on
www.weeklystandard.com A spectre is haunting Europe—the spectre of the disintegration of the Eurozone. Some 17 of the 27 nations that constitute the European Union have abandoned their own currencies in favour of the euro. This means they have given up control of their exchange rates and their interest rates, the latter set by the European Central Bank on a one-size-fi ts-all basis. In fact, it is the state of the German economy, the area’s largest, that dictates interest rate policy for the entire 17-country group. When Germany was suff ering under the weight of the costs of reunifi cation, its sluggish economy needed, and got, a low-interest rate policy from the European Central Bank. That eventually proved too stimulative for, say, Ireland, which was in the midst of an infl ating property bubble. The creation of the eurozone also led lenders to assume that the credit of every
member was just about as good as the credit of Germany and France. So Greece, Portugal, Spain, and Italy could sell sovereign debt at very low interest rates and use the borrowed money to fi nance an expansion of their welfare states—Greeks, for instance, could retire at 50 if they were in a hazardous occupation such as hairdressing (all those chemicals). More importantantly, countries like Portugal, with a poorly educated workforce, and Spain, with politically-run regional banks making imprudent loans to local property developers, became non-competitive with their eurozone colleagues and international rivals. No problem: Fiscal policy was not controlled from the centre, and investors hadn’t yet realized that lending to the so-called PIGS (Portugal, Ireland, Greece, and Spain) was a hazardous occupation. Then the rating agencies rose from their torpor and downgraded the sovereign debt of Greece, helping to drive interest rates on its government bonds to unsustainable levels. Enter Brussels with a bailout for Greece. And when Ireland’s defi cit soared to 32% after the government decided to guarantee the debts of its insolvent banks, enter Brussels with a bailout for Ireland. The main bailer, of course, is Germany, with an economy growing smartly on the back of an export boom. Chancellor Angela Merkel has two reasons to play Lady Bountiful. The fi rst is her belief, shared by the German elite, that if a euro country declares bankruptcy, the currency will lose credibility and the entire European project will come unhinged. That would leave Germany alone at the top of the European heap, Europe’s most powerful country with its most powerful economy. History makes many Germans less comfortable with a German Europe than with a European Germany. Secondly there is the small matter of the German banking system. The German banks, especially the state-run Landesbanken, are so woefully undercapitalized that some are planning to opt out of the new stress tests because they know they will fail. These banks are sitting on €220 billion of sovereign and bank debt of Greece, Portugal, and Spain, and if those IOUs become worthless, the German fi nancial system might come tumbling down or at minimum require a taxpayer bailout. To make matters worse, France sits on another 150 billion euros of this dicey paper. All of these bailouts, and those
Florida ponders property tax cap Best of the Blogs
By Matt Dixon writing on
politijax.com Despite strong opposition from cities and counties across the USA, the American House of Representatives is going through the process of approving a proposed constitutional amendment that grants business owners, landlords and investors a limit on how much their property tax bills can increase. The proposed amendment (HJR 381) would allow Florida voters to decide whether to off er owners of non-homestead property (essentially anyone who owns a business, second home or rental property) a cap on their property taxes. The Senate version has a proposed cap on tax increases of 5%. That is a big reduction from current law, which says that for non-homestead
properties property taxes can go up no more than 10% a year. But counties and cities oppose the measure because it could drain their revenue stream, causing them to levy higher taxes on all property owners to make up the diff erence. “If you purchased a home, a second home or business you would be realizing
no benefi t,” said bill sponsor Rep. Chris Dorworth, R-Lake Mary, while the person next door might pay far less in property taxes. The bill also gives a special tax discount to fi rst-time homebuyers. The measure was amended to off er a fi rst-time homebuyer tax discount of
50% of the home’s value, not to exceed 50% of the median home price in that county. This was a less generous discount than originally proposed under the bill. “The main goal is really to bring more fairness to Florida’s system,” said John
Sebree, a lobbyist for the Florida Association of Realtors. Under the “Save Our Homes” law, owner-occupied homes have their property tax increases capped at 3%. But owners of vacation homes or rental property have 10% caps. Realtors argue that renters also suff er from the cap diff erence because
landlords may see their property taxes rise and pass it on in the form of higher rent. Of all the residential properties in Florida, about a third are occupied by renters
or second-home owners, according to the Realtors. “Since negotiations have been going on, we have been fi rm on 7%,” said League of Cities lobbyist Amber Hughes. “We think that is an appropriate cap on non-homestead. It would give the stability the proponents of the bill are after and still mitigate some of the concerns we have.” A Senate staff analysis of the proposal says cities and counties could see a $452
million hit on tax revenue just in the 2013-2014 fi scal year alone. But the Senate version (SJR 658) never passed its fi nal two committee stages.
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