Europe capital flight - from Spain and Italy to Germany , the Netherlands and Luxembourg. Italy protests over Monti austerity plans - in particular the impact on pensions. Public discontent growing and growing....
The euro area’s financial troubles appear to be flaring up again, as this week’s gyrations in the Spanish bond market show. In reality, they never went away. And judging from the flood of money moving across borders in the region, Europeans are increasingly losing faith that the currency union will hold together at all.
In recent months, even as markets seemed calm, sophisticated investors and regular depositors alike have been pulling euros out of struggling countries and depositing them in the banks of countries deemed relatively safe. Such moves indicate increasing concern that a financially strapped country might dump the euro and leave depositors holding devalued drachma, lira or pesetas.
Capital flight in the euro zone (selected countries, cumulative since Feb. 2010) Source: National central banks. Data for Italy include balances related to the issuance of euro banknotes.
Illustration by Bloomberg View
The flows are tough to quantify, but they can be estimated by parsing the balance sheets of euro-area central banks. When money moves from one country to another, the central bank of the receiving sovereign must lend an offsetting amount to its counterpart in the source country -- a mechanism that keeps the currency union’s accounts in balance. The Bank of Spain, for example, ends up owing the Bundesbank when Spanish depositors move their euros to German banks. By looking at the changes in such cross-border claims, we can figure out how much money is leaving which euro nation and where it’s going.
This analysis suggests that capital flight is happening on a scale unprecedented in the euro era -- mainly from Spain and Italy to Germany, the Netherlands and Luxembourg(see chart). In March alone, about 65 billion euros left Spain for other euro- zone countries. In the seven months through February, the relevant debts of the central banks of Spain and Italy increased by 155 billion euros and 180 billion euros, respectively. Over the same period, the central banks of Germany, the Netherlands and Luxembourg saw their corresponding credits to other euro- area central banks grow by about 360 billion euros.
The seven-month increase is about double the previous 17- month rise, and brings the three safe-haven countries’ combined loans to other central banks to 789 billion euros, their highest point on record. In essence, the central banks of the three countries -- and, by proxy, their taxpayers -- have agreed to make good on about 789 billion euros that were once the responsibility of Italy, Spain, Greece and others.
The worries about Italy and Spain reflect the inadequacy of Europe’s efforts to stem what has become a combined banking, sovereign debt and economic crisis. The European Central Bank’s efforts to prop up bond markets with more than 1 trillion euros in emergency bank loans have only encouraged Italian and Spanish banks to buy more of their governments’ bonds, tying their fates to those of the afflicted sovereigns. The harsh austerity measures required by Europe’s new fiscal compact are making things worse by stunting the economic growth needed to help the countries reduce their debt burdens. Should markets balk at lending to Italy and Spain, Europe’s bailout fund -- with only about 600 billion euros in spare capacity -- remains far too small to cover the two countries’ financing needs, which amount to more than 1 trillion euros over the next five years.
If Europe’s leaders want to stop the rot, they’ll have to change their approach. The least bad solution, as Bloomberg View has argued, is a combination of overwhelming force and deeper integration. Together with the European Union and the International Monetary Fund, the ECB would provide large enough guarantees -- more than 3 trillion euros, by our estimate -- to erase any doubt that solvent governments such as Italy and Spain can cover their financing needs and banks can raise capital. If the amount pledged were big enough to tame markets, it wouldn’t have to be spent.
Aside from adopting tougher fiscal rules to get government debts under control, the euro area should also forge a closer fiscal union to provide some support for struggling countries, much as federal transfers in the U.S. cushion downturns in individual states. This could help Greece, Portugal, Ireland, Spain and Italy extract themselves from the downward spiral of budget cuts and weakening economies.
The idea that Europe’s current incremental approach has the advantage of saving money is an illusion, and not just because the disintegration of the currency union could trigger a global financial meltdown. As the capital flight figures demonstrate, the stricken nations of the euro area are bleeding private money and becoming increasingly dependent on taxpayers. In all, the debts of struggling banks and sovereigns to official creditors such as the EU, the ECB and national central banks now exceed 2 trillion euros, much of which would be lost if the debtor nations dropped out of the currency union.
Hopefully, Europe’s leaders will recognize that it would be a lot cheaper to put up the money needed to restore confidence in the common currency. If they wait too long, the cost of the crisis could prove to be more than their taxpayers can bear.
Italy’s main labor unions took to the streets of Rome today to protest Prime Minister Mario Monti’s pension-system overhaul, saying it traps hundreds of thousands of workers in a legal limbo without retirement pay.
Maria Dinelli is one such person. When she left Alitalia SpA (AZA) in 2008, her early-retirement deal with the airline provided jobless benefits until her pension payments begin in 2015. Now, under the reform that raised the retirement age, Dinelli won’t get the payments until 2017, leaving her stuck in a two-year gap without any income.
Italy's Prime Minister Mario Monti. Photographer: Ed Jones/Pool via Bloomberg
“I’ll be without a salary or pension for two full years before the retirement age, and will have to put money aside,” Dinelli, 58, said in a Bloomberg Television interview in Rome. “You were told you had guarantees, then you lose it all because a new government takes power and changes the rules.”
Monti’s pension plan was part of a $26 billion austerity package passed in January to fight the sovereign crisis by putting Italy’s debt, the second highest in Europe after Greece, on a downward trajectory from next year. Monti followed with measures to open closed professions, reduce bureaucracy and ease firing rules that helped bring down the country’s bond yields from near euro-era highs when he took power in November.
Tens of thousands of people marched through the streets of central Rome this morning before a rally where union leaders criticized the government for underestimating the extent of the problem. Last night the Labor Ministry said there are 65,000 Italians who may be left without support between when they leave work and when their pension kick in as the higher retirement age delays their payout. Unions say the figure is about five times that amount.
“We weren’t impressed by the government’s statement,” Raffaele Bonanni, head of the CISL union, told the crowd in Rome’s Piazza dei Santi Apostoli. “The labor minister is acting like an ostrich, sticking her head in the sand because she doesn’t want to look in the faces of the hundreds of thousands of people here today seeking clarity.”
The Labor Ministry “is studying ways” to assist some workers who signed collective agreements that provided them with jobless benefits for the period until their pensions start, the ministry said, according to the e-mailed statement.
The ministry’s figures contrast with those of CGIL, which estimates 300,000 workers have been left in the lurch by Monti’s overhaul, according to Claudio Di Berardino, head of the union in the Lazio region. “If these figures were correct, then we’d have to say that the thousands of workers who’ve turned to the union for help are not real and just ghosts,” Vera Lamonica, a CGIL leader, said in an e-mail. “The government is playing with fire.”
Mauro Nori, head of pension agency INPS, told the Senate Labor Committee on April 11 that the group totals at least 130,000. Providing assistance to such workers could “require additional resources of about 10 billion euros ($13 billion),” Roberto Pessi, a labor law professor at Rome’s Luiss University, said in an interview. He estimated the group may total as many as 450,000 workers.
Besides raising the pension age and penalizing early retirement, the reform based the system on contributions rather than salary and ended inflation indexation for larger pensions. The overhaul means that younger workers will collect smaller pensions than their parents.
The plan, which Monti has called “cutting edge,” was part of his efforts to shore up public finances to boost economic growth, which has trailed the euro-region average for more than a decade. Italians are chaffing under the effects of the austerity package, which apart from lower pensions, brought higher taxes and record gasoline prices that have reached almost 2 euros a liter, or $10.50 a gallon. The resulting slump in consumer demand helped push the economy into its fourth recession since 2001.
“An overhaul of the pension system was unavoidable because the old scheme was too generous compared to the country’s possibilities and the European standards,” Nicola Marinelli, who oversees $153 million at Glendevon King Asset Management in London, said by phone. “That said, the protest of these workers may be a harbinger of future social tensions. I don’t think younger workers have really realized they will have starvation- level pensions.”
While the Labor Ministry is looking into ways to help some workers left in limbo, the pension overhaul included financing “adequate to cover all needs without requiring recourse to further resources,” according to last night’s statement.
Labor Minister Elsa Fornero, author of the pension changes and the jobs-market shakeup, said on April 3 that experts from the government and INPS will come up with a solution by June 30.
“I can’t rule out that the government will resort to a wealth tax,” said Pessi, the labor law professor. “So far, the government hasn’t used a heavy hand with the richest taxpayers, partly to avoid negative consequences as far as foreign investments are concerned, but now I think it’s about time for those who have more to contribute to the needs of the country.”
Back in her Rome apartment, Dinelli looks at bookshelves full of guides to countries such as China, India and Australia.
“After working for so many years, I’d have liked to spend money the way I wanted, maybe traveling or enjoying some peace of mind,” she said. “I think people in my situation have lost faith in our institutions.”