Euro Dies Slow Death Without Common Fiscal Policy

Commentary by Matthew Lynn

May 18 (Bloomberg) -- The time for tough decisions is here. In the next few months, the members of the euro area will have to make a choice: create a genuine fiscal and political union or let the euro die a slow death.

The European Union now realizes the Greek crisis has revealed some major flaws in the common currency. There’s no point trying to fudge it. The euro can only be rescued by a sweeping centralization of control over tax and spending.

There’s just one snag: A single economic government for the euro area isn’t going to work. The surrender of national sovereignty is too great. The timing is all wrong. And there is still no realistic mechanism for enforcing whatever new rules are made in Frankfurt or Brussels.

With every step that this crisis takes, the euro moves closer and closer to falling apart. In a few years, we’ll be talking again about the deutsche mark, the franc and the peseta.

After dithering for too long, policy makers now recognize that the foundations of the euro weren’t strong enough.

The Stability and Growth Pact, which limited budget deficits to 3 percent of gross domestic product, didn’t work. Greece was running fiscal gaps far larger than those during the good years, and plenty of other nations were as well once the global economy turned down. It became a massive free lunch.

Countries could spend like crazy and get their neighbors to bail them out. It was hard to see how the system could survive for long if those were the rules. Everyone had an incentive to do the spending. No one had any incentive to do the bailouts.

EU Response 

“The Commission proposes to reinforce decisively the economic governance in the European Union,” the EU said in a statement last week. Member states will have to submit their national budgets to the EU for approval.
It isn’t hard to see the implications of that.

“The sovereign-debt crisis could be acting as a catalyst for an ever closer union of European countries,” Morgan Stanley said in a May 11 note to investors. “The decisions taken this weekend first by European leaders and then by finance ministers mark a big leap towards a fiscal union in the euro area.”

A fiscal union -- in which budgets and taxes are decided centrally -- would fix the problem. Member states wouldn’t be able to run up unaffordable deficits. When they ran into trouble, money could be diverted from the more successful states to the ones that needed help. That’s how it works within countries. It is how the euro should work, too. But here’s why it probably won’t.

Three Reasons 

First, the surrender of sovereignty is too great. Countries signed up to a single currency. They didn’t sign up for a single government. Once you lose control of fiscal policy, you stop being a nation, and you become a district. It is hard to believe that will ever survive referenda or national elections. It is hard enough to persuade taxpayers to subsidize regions in the same country. Persuading electorates to send their taxes to a central authority, without having any control over where it is spent, will prove impossible.

“The budget law is a matter of national parliaments,” Guido Westerwelle, Germany’s foreign minister, said last week. “The European Commission doesn’t determine the budget. That is the job of the German Bundestag, the national parliament.”

Second, the timing is wrong. For the next five years, the only thing governments will be serving up is pain. Deficits are out of control. Spending has to be cut. Creating any kind of fiscal union was going to be tough enough even in the boom years, when you could hand out lots of cash to build new schools and roads. It will be much tougher when spending is being cut. The EU will take control of national budgets at precisely the moment they get slashed. Does that sound popular? Not really.

No Enforcement 

Third, there still isn’t an enforcement mechanism. The latest proposal is that all the national budgets get submitted to Brussels in advance. The EU will approve them, or it won’t.

So what happens if a budget is rejected, and local politicians tell the EU to go take a hike? Euro police aren’t about to storm member parliaments and cart politicians away in handcuffs. So far, all that has been proposed is a rewrite of the stability pact, but with some more forms to fill in, and a bit of snarling if you break the rules. It didn’t work last time, so why should it work now?

The EU has come up with the only realistic solution to the crisis presented by Greece’s mountain of debt. But it’s still not going to work. And once that becomes clear, there will be only one option left: let the euro die.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

Malaysia’s Global Sukuk Bonds Rated Investment Grade

May 19 (Bloomberg) -- Malaysia’s planned global Islamic dollar bond, its first sovereign debt offering in almost eight years, was assigned preliminary investment grade ratings of A- by Standard & Poor’s and A3 from Moody’s Investors Service.

The Southeast Asian nation is tapping the international debt market for the first time since 2002 as the government aims to increase development spending to boost economic growth. Sales of notes that comply with the religion’s ban on interest rose 24 percent so far in 2010, the most in three years, as the European financial crisis bolstered demand for alternative investments in emerging markets.

Malaysia had a budget deficit of 7 percent of gross domestic product last year, compared with 13.6 percent for debt- stricken Greece, 11.2 percent for Spain and 9.4 percent for Portugal. For an emerging market, Malaysia has a “a strong credit standing,” according to Exotix Holdings Ltd. in London.

“There will be demand because Malaysia’s back in the market for the first time in a long time,” Stuart Culverhouse, chief economist at Exotix Holdings, said in an interview yesterday. “It is seen as a country that’s followed sound economic policies, economic orthodoxy with strong institutions and with an established track record of paying its debt.”

‘Strong External Position’

The country starts marketing the sukuk notes from today to investors in Asia, Europe, the U.S. and Middle East, with Barclays Capital, HSBC Holdings Plc and Malaysia’s CIMB Group Holdings Bhd. lead arrangers, a banker with knowledge of the matter said yesterday, declining to be identified. Malaysia is the world’s biggest market for Islamic bonds, which are backed by physical assets and pay profit rates instead of interest, which is prohibited by Shariah law.

The rating “reflects the strength of the transaction documentation, including the lease and purchase undertaking agreements,” S&P said in a statement released late yesterday.

“Malaysia’s sovereign creditworthiness has been underpinned through the global crisis by its strong external position, deep and liquid domestic capital markets, and a strong and well managed financial system,” Aninda Mitra, a vice- president and Moody’s lead sovereign analyst for Malaysia, said in a report today.

‘Better Reception’

The $195 billion economy is forecast by the central bank to expand as much as 5.5 percent this year after emerging from its first recession in a decade in the fourth quarter. Prime Minister Najib Razak plans to unveil a new five-year development plan in June.

Yields on bonds in Greece, Portugal and Spain have surged as the countries struggle to rein in budget deficits, which are the largest in the European Union, and finance debt obligations. Greece will tap emergency loans from the euro region today to repay 8.5 billion euros ($10.5 billion) of 10-year bonds.

“When there’s a drop in confidence in the traditional bond market, when there is concern with the traditional bond or traditional credits like in Europe, people look for diversification and therefore bonds from the Far East and Islamic bonds can get a better reception in this environment,” said Nazir Razak, chief executive officer of CIMB Group Holdings, Malaysia’s top underwriter of sukuk notes last year.

Pricing Benchmark

The latest sovereign issue will provide a new benchmark for pricing bonds in Malaysia as the only other outstanding global note matures next year. The 7.5 percent security maturing in July 2011 yielded 1.21 percent yesterday, 59 basis points less than at the end of last year, according to data compiled by Bloomberg.

“Just because it’s a sovereign debt doesn’t mean that it’s risk free,” Ali Khan, head of cash-equity trading at Dubai- based Arqaam Capital Ltd., said in a telephone interview yesterday. “Even sovereign debt right now will have to pay more in the debt market because of the prevailing scenes surrounding sovereign debt in Europe and the United Arab Emirates.”

Malaysia May Raise $1.5 Billion From Bond Sale, Official Says

By Soraya Permatasari, 

--With assistance from Dana El Baltaji in Dubai. Editor: Simon Harvey, Barry Porter
To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net
To contact the editor responsible for this story: Sandy Hendry at shendry@bloomberg.net

Newscribe : get free news in real time 

Invest In What You Know

Investment Strategy   

Have you ever known certain products would be successful months before they became a hit? Find out how to profit from your intuition.

Investing can be extremely intimidating, from the serious newspaper articles detailing how millions will no longer be able to retire, to the angry man on television yelling about dividends, it's no wonder so many of us are hesitant to take the leap into the money market. For many otherwise intelligent, confident people, the idea of risking hard-earned cash in a market they don't truly understand just doesn't make sense. But the truth is, you may have an advantage over Wall Street brokers when it comes to investing--your personal area of expertise.

Do as Buffett Does

You've probably heard of the legendary investor Warren Buffett, who is currently the third-richest man in the world, according to Forbes. What sets Buffett apart is how many people turn to him for investing advice--and one of his personal investing rules (right after "never lose money") is if you don't understand a business, don't buy it.

The flipside? If you understand a business, or a sector, you could have the upper hand when it comes to buying its stock. Your experience may not seem to be financially related, but with the ability to invest in everything from movies to weather, your knowledge might come in handy in the stock market.

A Niche for Everyone

No matter who you are, there is something you are interested in. And no matter what that is, you can translate that interest into valuable trading information. If you are a tech geek, you'll know if fragmenting Linux will help it to compete with Apple's ( AAPL - news - people ) range of products. If you worked on the oil rigs in Alberta, you'll know which companies were efficient enough to have a shot at major growth over the next few years.

Are you a fitness buff or do you play a sport intensely if not competitively? You know what equipment, supplements and companies are behind athletes like yourself. Maybe your passion lies in videogames; with "Halo: Reach" set for release this fall, now might be the time to get into Microsoft ( MSFT - news - people ).

Perhaps you're a bookworm, someone who reads every New York Times best seller before it actually makes it to the list. If so, you might have caught Harry Potter as it was picked up to be turned into a movie, and invested in Warner Brothers' parent company, Time Warner ( TWX - news - people ).

Related Video: Best High-Tech Master's Degree

Comments

The general theme of this article isn't bad, but the examples it gives are terrible. All the companies (MSFT, GOOG, AAPL, TWX) are huge companies where special knowledge of a small piece of their bu....

Don't just consider the companies benefiting directly from a new trend or product. The next big thing also affects secondary players in a given market in a trickle-down effect you can cash in on. Or, consider products you think will be a bust and either short the stock or invest in the rival. For example, if you think Google's ( GOOG - news - people ) "iPad killer" just isn't going to cut it, you can invest to reflect that opinion.

The Bottom Line
Investing doesn't have to mean researching banks or investment firms--although it certainly can. By focusing your stock picks on companies and industries that interest you outside of your financial obligations, you will likely make more informed choices. Keep in mind that knowing an industry should not be an excuse to avoid doing any research into a specific company. Even if your insider knowledge gives you a leg up, every investor should hold themselves responsible for doing their due diligence. And who knows, you may even discover that investing can be fun!

BY Erin Joyce

Newscribe : get free news in real time

Yahoo Buys Online Content Factory for $90 Million

Yahoo has joined the race to mass-produce content for the web with its purchase Thursday of Associated Content for a rumored $90 million.

Associated Content, like Demand Media and AOL’s new Seed project, relies on thousands of freelancers to write and film how-tos, profiles and top-whatever lists for web publication — with help from search algorithms to determine what content should be created next. Associated Content has been able to attract brand-name advertisers to its site, especially for how-to articles like this one on choosing the right-sized hammer, which are surrounded by ads from Coldwell Banker and Fidelity.

“Combining our world-class editorial team with Associated Content’s makes this a game changer,” said Carol Bartz, Yahoo’s CEO. “Together, we’ll create more content around what we know our users care about, and open up new and creative avenues for advertisers to engage with consumers across our network. These are important aspects of building engaging consumer experiences on Yahoo, and one of the reasons why we’re one of the most visited destinations online.”

Yahoo has long considered itself to be a provider of higher-end media, combining news and features written by its own staff with paid news feeds, and then adding curated links to other sites’ content. It’s not clear if Associated Content will be rolled into Yahoo’s site or if it will continue operating on its own, gaining page views and revenue through visitors stumbling on content through search. If not careful, Yahoo runs the risk of devaluing its brand and creating so much ad space that it can’t continue to charge premium rates to advertisers.

Associated Content has more than 16 million unique users per month, according to Comscore, and the editorial staff “reviews more than 50,000 pieces of content per month, including articles, images, audio and video,” according to the press release announcing the acquisition.

Associated Content considers itself to be a step above Demand Media, which gained much attention for its use of search logs to figure out what obscure topics users were looking for — but couldn’t find — and then creating cheap content to fill that hole. Yahoo says it will use its search engine to help identify topics that users and advertisers care about.

In announcing the purchase, Yahoo says it will expand Associated Content’s operation globally and will close the sale in the fall. It did not disclose the purchase price, but veteran Yahoo reporter Kara Swisher reported the company paid $90 million.

Photo: Yahoo in Times Square
Henrique Vicente
By Ryan Singel
Newscribe : get free news in real time

Banks, be professional

I REFER to the letter “Bank's collection agency as bad as Ah Long,” (The Star, May 17) in which the writer says, “The banks have certainly lost their sense of professionalism.”

I agree and although such complaints only appear occasionally in the press, there are reasons to believe that many people are in the same unfortunate situation and their number is increasing daily.

These people are harassed relentlessly and mercilessly while they are unable to defend themselves, either because they don't know how or they think the bank is right.

Yet, the bank is not right. Two essential laws of economics and business state that money is the reward for work done, and a business deal must be equitable to be successful.

Banks were originally set up so that customers could deposit their money with them.

A deposit is automatically a saving because the customer would not put the money in the bank if he needed it.
If the bank is true to its function, it should guard the customer's money and also increase its amount.

This way, the customer's confidence in the bank will grow and he will continue to deposit money with it.

In order to increase the customer's money, the bank must set to work and ensure the deposit grows in a manner that is lawful and beneficial to the customer, the bank and society at large.

These days, banks prefer to make money by charging late payment fees and a host of other punitive fees which are non-earned income and therefore can be termed as usury.

Besides destroying customer's confidence, usury seriously undermines the economy because usury does not recognise the value of work and only concentrates on getting the pieces of paper and coins that constitute money.

The banks have also forgotten how to make an equitable business deal.

Equitable means that both parties in the transaction stand to gain or lose in the same proportion.

Bank deals, however, are inevitably slanted in favour of the bank. Maybe the banks think that giving out money also gives them the upper hand.

But the fact is that money in itself has no value, rather it is work that brings value to money.

Usury disregards the value of work, and people who have no work or are not adequately paid for the work they do, simply cannot repay their loans.

A bank that lends money and does nothing to ensure economic conditions are favourable to both employment and trades, will eventually end up getting money only from the National Mint.

The banks must urgently revise their way of doing business and foster a culture of saving, where saving does not mean refraining from buying, but rather buying what you need with the money one has saved from what he earned from his work, and not borrowed.

The Government, on its part, must considerably reduce their humongous benefits and subsidy schemes that render people dependent, debt ridden, sick and poor.

No government or business can defy the law of the market which states that money is the reward for work done.  

By MARISA DEMORI, Ipoh