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FBR should announce amnesty for income tax cases to achieve Rs1952 billion tax target: ICCI ISLAMABAD
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OvERnMEnT should take additional measures for simplification of tax system against the target of Rs1,952 billion for ongoing fiscal year. These remarks were made by Yassar Sakhi Butt, President Islamabad Chamber of Commerce and Industry during a meeting at Chamber House. He said that Exemption from penalties and default surcharge for all taxes will be beneficial for maximum revenue collection during this financial year. He said that exemption from default surcharge and penalties has been announced in Sales Tax and Federal Excise cases through SRO 548 dated 22nd May 2012. Whereas, in case of Income Tax amnesty has been given to withholding tax agents only through SRO 548 dated 22nd May
2012. Thus, he said that such amnesty should be announced for Income Tax cases as well where any amount is outstanding on account of any audit observation, audit report, show cause notice or any adjudication order or who has failed to pay any amount of tax due under the income tax ordinance 2001 due to any reason. ICCI President said that Government should announce the realistic economic targets for forthcoming fiscal year 2012-13 by keeping in view the ground realities to achieve sustainable development. Yassar Sakhi Butt said that amnesty across the board for all taxes will facilitate both the tax payers and the tax department for settlement of the pending cases and will save the time and cost both of the tax payers and the department. He expressed concern over the missed tax collection target of Rs1,588 billion in the last fiscal year that shown a deficit of Rs30 billion and said that
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proactive measures should be introduced to plug the leakages and improve the refund system in tax departments. He said that deadline for payment
has been fixed for 31st May 2012, therefore, ICCI President was of the opinion that the deadline for payment should be extended to 15th June 2012.
Facebook options debut a wild card for volatility DORIS FRANKEL REUTERS
Investors can hope the debut of options on Facebook Inc goes more smoothly than the long-awaited debut of the social networking service’s stock on May 18. While the stock’s puts and calls are expected to be popular, the big wild card is volatility and ultimately, the options price. Traders will get a fresh start on options on the Internet giant when the contracts are offered on U.S. options exchanges on May 29. BATS Options exchange, a division of BATS Global Markets, will list the options on May 30, following its standard practice of listing new options a day later than the other exchanges. Plenty of uncertainty surrounds the stock, which debuted to much fanfare at $38 and immediately ran into problems. Facebook’s first day of trading was marred by technological glitches, and the company faces criticism that it sold too many shares, overwhelming demand. A week later, the stock was at $31.47, down 17.2 percent. Options volume is expected to be robust. “It’s a cocktail party stock and probably will attract a lot of
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participation from retail traders,” said Steve Place, a founder of options analytics firm investingwithoptions in Mobile, Alabama. The stock’s valuation remains high - the forward price-to- ratio is at about 56, and the stock is expected to stay volatile. Premiums - the price paid for options - must reflect that uncertainty and will be even more difficult to pin down. “The real issue like everything else in the market is about value, and with Facebook, we simply don’t know what their true earnings power is at this moment,” said Jeff McAllister, vice president of education at options education website optionsan-
imal.com in Lehi, Utah. PRICING RISK AN UNKNOWN UNTIL TRADING OPENS: Before the IPO, investors had an anchor on what to expect regarding the share price. But in the options market there is no indication of what the demand will be. So implied volatility, a key component of an options price, which measures the market’s perceived risk of future share price movement, remains an uncertainty until the first transactions. “Figuring out the implied volatility is a chickenand-egg scenario - that value won’t be known until the market opens up, when market makers will gauge the supply and demand to price risk,” Place said. If there is significant demand for options, either through speculators or hedgers, the implied volatility will be elevated, and the price of the option will rise. Place looked at the implied volatility readings of LinkedIn, Groupon, Pandora, Zynga, Yelp and Zillow from the day their options opened on each of these stocks as well as the stock and options volume. “Using these past values as a guide, we can expect Facebook options to have a 30-day implied volatility between 65-85 percent,” he said. “The mid 70s would be a good estimate.”
About 3 million businesses in Pakistan operate as non-corporate entities and there is an urgent need to get them incorporated so that they become part of the formal and documented corporate sector, with the vision of ‘Pakistan Incorporated.’ Muhammad Ali, the SECP Chairman, made these remarks while concluding a two-day registrars’ conference on the theme ‘sharing knowledge, sharing successes,’ which ended on Saturday. He urged the participants to intensify their efforts to encourage all businesses in Pakistan to corporatize. The automation is the key to public facilitation and it should remain our focus, he said. Being the public face of the SECP, the CROs play a key role. He appreciated the efforts of the CROs in implementing the SECP’s reform agenda, vowing to make the conference an annual feature. The conference was aimed at sharing ideas and knowledge on elevating the role of the registrar, both as a regulator and facilitator. It provided a useful forum for interaction, planning and devising future strategy for registrars’ working at the SECP front end offices, i.e., Company Registration Offices (CROs). The first day of the conference focused on the interaction among registrars, defining their roles, celebrating success and planning to work towards future. The second day focused on the implementation of an action plan and sharing of knowledge to achieve collective success and coordination among the registrars. During the conference, a SWOT (strengths, weaknesses, opportunities, threats) analysis of the registrars’ function was performed, on the basis of which an action plan was devised and responsibilities were assigned for its implementation. Tahir Mahmood, the Commissioner, Company Law Division, congratulated the registrars working across the country on their contribution to the development of the corporate sector and its sizable growth. Sharing his expectations for the conference, he highlighted that it is an important step in the essential process of interactive cooperation among regulators and a tool to better understand the practical problems enabling the SECP to respond quickly with the best possible solutions.
Oil edges up on Iran, but posts fourth weekly loss NEW YORK REUTERS
Oil prices rose for a second day on the lack of progress in negotiations with Iran over its disputed nuclear program, but crude futures posted a fourth straight weekly loss as Europe’s debt problems threatened economic growth and petroleum demand. Euro-zone political turmoil and economic uncertainty pressured the euro against the dollar, and along with recent signs of slowing Chinese economic growth and rising U.S. crude oil inventories, helped limit gains of Brent and U.S. crude futures. This week’s negotiations on Iran’s nuclear program yielded little progress, though the six major powers and Tehran agreed to meet again in June, keeping the threat of conflict and supply disruptions in play for investors. news that Iran has enhanced its ability to enrich uranium and that U.n.
inspectors found traces of uranium particles enriched at a higher rate than reported by Iran increased concerns in the oil markets ahead of the three-day U.S. Memorial Day holiday weekend. U.S. consumer sentiment rose in May to its highest in more than four years, the Thomson Reuters/University of Michigan final reading for the month said. The bigger-than-expected increase added support for oil prices. Brent July crude rose 28 cents to settle at $106.83 a barrel, having swung from $106.02 to $107.24. The fourth straight weekly loss was only 31 cents, but Brent has fallen $13, or 10.85 percent, in that four-week period. U.S. July crude edged up 20 cents to settle at $90.86, having moved from $90.20 to $91.32, and remaining inside Thursday’s trading range. For the week, it fell 62 cents and losses during the fourweek period total $14.07, or 13.4 percent. Brent’s premium to U.S. crude increased to $15.97, after dropping to
$15.57 and reaching $16.25 intraday. Trading volumes were anemic, with U.S. crude turnover 56 percent below the 30-day average. Brent dealings outpaced U.S. volume, but were 37 percent below the Brent 30-day average. U.S. gasoline futures for June delivery edged up 1.64 cents to finish at $2.8929 a gallon, ahead of the busy summer driving season, but rose just 0.66 cents from the previous week’s close. All week long, the gasoline contract was range-bound and pivoted around its 200-day moving average, having moved below the gauge on February 17 for the first time since February 2. At the settlement price, U.S. gasoline futures had retraced half of their 41 percent rally from november to end-of March, during which prices rose $1 to $3.4455 a gallon. Technical analysts consider the so-called 50 percent Fibonacci retracement significant because it brings the price below a key level of support. Meanwhile, money managers raised
their net long U.S. crude futures and options positions, but by only two contracts, in the period to May 22, the U.S. Commodity Futures Trading Commission said. “The drop in the euro against the dollar and the drama in the euro zone have pulled crude off highs, but the IAEA finding high uranium traces in Iran may help keep crude prices supported ... and brings up the question again of how patient will Israel continue to be,” said Phil Flynn, an analyst at PFGBest Research in Chicago. The euro tumbled to nearly a twoyear low against the dollar on Friday as fears of a possible Greek exit from the euro zone and the risk that other debtplagued countries could also leave the bloc rattled markets. A request from Spain’s wealthiest autonomous region, Catalonia, for central government help with refinancing debt was the latest news to hit the euro. IRAN’S NUCLEAR PROGRAM DIS-
PUTE: Iran’s insistence on the right to enrich uranium and Western powers’ requirement that Tehran first shut down higher-grade enrichment before sanctions are lifted continued to be sticking points in talks held in Baghdad this week. A senior State Department official headed to Tel Aviv on Friday to reaffirm the U.S. commitment to Israel’s security following the talks between six world powers and Iran. The U.n.’s IAEA said Iran has raised its potential capacity to make sensitive nuclear material by installing hundreds of new enrichment centrifuges at the Fordow underground site. The IAEA also said on Friday that it had found traces of uranium particles enriched to up to 27 percent at Iran’s bunkered Fordow site, compared with the 20 percent enrichment Tehran has officially reported to the IAEA. The IAEA said that Iran told the U.n. agency that this higher-grade enrichment “may happen for technical reasons beyond the operator’s control.”
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02 news Spain region, Greek exit warnings rattle euro zone Central banks and companies risk making a grave error if they do not brace for a possible Greek exit from the euro zone, Belgium’s foreign minister said, rattling markets already alarmed by Spain’s deteriorating finances
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REEK elections are scheduled for June 17 and could hasten the country’s departure from the currency club should a government intent on ripping up the country’s bailout program result. Contrasting findings of opinion polls on Friday showed the outcome is too tight to call. Greece accounts for little more than 2 percent of the euro zone economy but could pose a profound contagion threat if it quit the currency area, throwing the spotlight on Portugal, Spain and even Italy. “There is no organized discussion at the European level along the lines of: what do we do (if Greece leaves),” Didier Reynders, who is both Belgium’s foreign minister and deputy prime minister, told the European American Press Club in Paris. “now, if central banks and companies are not preparing for the scenario, that would be a grave professional error.” Spain is in plenty of trouble even disregarding any backwash from Greece. Its wealthiest autonomous region, Catalonia, on Friday said it needed help from the central government because it was running out of options for refinancing debt this year. “We don’t care how they do it, but we need to make payments at the end of (each) month. Your economy can’t recover if you can’t pay your bills,” Catalan President Artur Mas told reporters. Spain’s trump card had been that it had successfully issued well over half the sovereign debt it needs to in 2012. But after revealing this week that its highly indebted regions faced 36 billion euros of debt refinancing bills this year, way above the previously stated 8 billion, that advantage may have been wiped out. On top of public debt, the country is hobbled by a banking sector overwhelmed by bad debts tied to a property market boom that went bust and still has some way further to fall. Bankia SA, Spain’s fourth-biggest
Delay in 3G technology creates uncertainty amongst buyers ISLAMABAD ONLINE
bank, on Friday asked for a bailout of 19 billion euros ($24 billion) to repair losses from a property crash - the biggest Spanish bank rescue ever. Spain is nationalizing Bankia, which holds some 10 percent of the country’s bank deposits. The government insists the bank is a one-off case, but economists say a wider bailout of the sector, either by Madrid or the euro zone, may become necessary. Adding to a miserable day for Spanish investors, Standard & Poor’s lowered its ratings on the debt of Bankia and four other Spanish banks and said it was taking a dimmer view of Spain’s economy. Markets have been buffeted by the escalating euro zone crisis in recent weeks and face more uncertainty up to the Greek election date, and maybe beyond. The euro plumbed near two-year lows against the U.S. dollar on the back of the Catalonian warning, stocks slipped, and Italian and Spanish borrowing costs rose. “The Catalonia news was a big deal because it implies that the Spanish government may have to
WILLIAM H LUERS/THOMAS R PICKERING Rearranging the deck chairs would not have saved the Titanic. nor did the endless debates on the shape of the table in the vietnam negotiations advance the effort to end that malign conflict. nevertheless, many American presidents have successfully redesigned talks with adversaries in bold new ways to strengthen national security without war. Such boldness is now needed in the negotiations over Iran’s nuclear program. In 1933, Franklin D. Roosevelt negotiated personally with Soviet Foreign Minister Maxim Litvinov to open diplomatic relations between the two countries. Dwight D. Eisenhower invited nikita Khrushchev to the United States in 1959 to open the eyes of the first Soviet leader ever to visit America. The bilateral US-China talks in Warsaw in the 1960’s were fruitless until Richard M. nixon and national Security Adviser Henry Kissinger opened a different, more direct discussion through the auspices of Pakistan. International negotiations with Iran over its nuclear program also need a new concept and broader agenda. The Istanbul meeting last month concluded on a positive note. Both sides decided to find a way to avoid the pattern of mutual recrimination and sterile exchanges. The
take on more debt and it cannot afford to do so,” said Richard Franulovich, senior currency strategist at Westpac Securities in new York. CONTINGENCY: EU leaders insisted at a summit on Wednesday that they wanted to keep Greece in the euro zone and they have good reason to, given the losses that could be inflicted on them and the European Central Bank should Greece on its debt. But sources told Reuters the Eurogroup Working Group - experts who work for the bloc’s finance ministers had told member states to begin making contingency plans for a Greece exit. “Our first priority is to keep Greece in the euro zone whilst they are respecting the commitments,” European Council President Herman van Rompuy told a news conference during a visit to Ljubljana, Slovenia, on Friday. “Of course we are reflecting on all different kind of scenarios, but we never discussed them neither in technical nor in political form,” he said. “The contingency plan is not our priority.” French banks, which are among
the lenders most exposed to Greece, have stepped up their plans for a Greek euro zone exit, sources familiar with the situation said. They include Credit Agricole, BnP Paribas and Societe Generale. “Every bank has a task force right now looking at the potential consequences of a return to the drachma,” a Paris-based banker said. Most economists agree the austerity measures foisted on Greece as part of its 130 billion-euro bailout will be impossible to deliver because they would drive the country deeper into recession and make debt even harder to cut. Peter Bofinger, one of the five “wise men” who formally advise the German government on the economy, said Europe should renegotiate the terms of Greece’s bailout as they were agreed on overly optimistic assumptions about growth. “The terms for Greece should be renegotiated,” Bofinger told Reuters in an interview. “That’s very important for both sides, because if you have an uncontrolled exit of Greece, it could lead to a ‘Lehman moment’ for Europe.”
The government has failed in timely auction of 3G technology in the country creating uncertainty among potential buyers who want to participate in the bidding process but not invited for the auction yet. All the dates announced earlier have been upheld and so far no official announcement has been seen for the auction and in this regard the first step was not even taken yet. The government had estimated to generate $630 million from the auction of 3G after setting a base price of $210 million for each license but failed to do so. Experts believe that government’s failure to auction 3G technology in the country before the fiscal budget for the year 2012-13 would leave negative impacts and its failure would further swelled the already widen budget deficit of the country. They said that the finance ministry has estimated to generate Rs 75 billion from the auction of 3G auction during the ongoing fiscal year2011-12. Earlier government had announced to auction of 3G in March and provincial bidders were asked to submit their expression of interest till the end of January however this announcement has not turned into reality. Telecom operators in the country are contemplating the launch of 3G technology however sources in the ministry of Information technology told online that after multi billion corruption scandal in India authorities in country are hesitant to launch the new technology. Sources at PTA told online that final date for auction is yet to be decided. They said that authority will now make sure that everything is all set to go ahead with auction before announcing the final date of 3G auction.
THE NIXON OPTION FOR IRAN? door is now open to an initial agreement with modest goals. But don’t count on a new era without some form of direct US-Iran discussions. The talks with the five permanent members of the United nations Security Council plus Germany (P5+1) are formulaic, stagnant, and not likely to achieve any breakthrough on their own. The Iranians feel out-numbered by diverse participants with varying agendas. The US needs to reshape the environment to make it easier for Iran to compromise. The US should press for bilateral talks. One lesson provided by former American presidents is the value of direct, high-level contacts with key adversaries. Of course, a face-to-face meeting between President Barack Obama and Ayatollah Ali Khamenei seems absurd to imagine – now. But could any meeting have seemed more absurd in 1969 than the 1972 meeting between nixon and Mao Zedong? The US and Iran need to set a path toward broad bilateral discussions on worldviews, regional security, and plans to improve mutual understanding in order to minimize differences. Even without direct US-Iran talks
now, the current negotiations need reshaping. The P5+1 should continue to negotiate with Iran on its uranium-enrichment program, while the International Atomic Energy Agency should negotiate with Iran on strengthening the transparency of its nuclear program. The Iranians want to resolve their problems directly with the IAEA, and to avoid negotiating under the cloud of Un Security Council resolutions, which impose sanctions on Iran to force suspension of enrichment. This situation suggests a phased approach. First, during the talks in Baghdad, the P5+1 might seek an early confidence-building agreement by which Iran voluntarily ceases enriching to 20% content in the U-235 fissile isotope and blends down or ships out their stockpile of such uranium, which is closer to weapons grade. They might also seek a standstill on the deep underground enrichment facility at Fordow, the deep underground enrichment facility near Qom, in exchange for provision of fuel rods for Iran’s research reactor and a freeze on some sanctions. Second, the P5+1 could then agree to agree to some Iranian enrichment as an
incentive for Iran to conclude a parallel agreement with the IAEA on greater transparency. These parallel steps would reshape the process to achieve a key US objective: ensuring that Iran abides by Khamenei’s own fatwa (religious decree) against nuclear weapons. Third, both sides will need to outline the long-term objectives of the negotiations. As the IAEA presses Iran for agreements on greater transparency, Iran wants to know where such agreements might lead, particularly regarding sanctions. Iranians claim that each time they move toward cooperation with the US, a new problem emerges to block improved relations. Iran wants to know which sanctions might be delayed, frozen, or lifted in exchange for current and future concessions, fearing that the US will continue to impose sanctions on humanrights, security, or other grounds. The US, for its part, views Iran as a duplicitous and unreliable negotiator that is committed to nuclear weapons and unserious about talks. The time has come to test Iran’s intentions by reaching something like the two-phased agreements outlined here – a longer-
term, step-by-step process with reciprocal actions, in which each side must give something to get what it needs. Finally, even with step-by-step progress on Iran’s nuclear program, broader discussions are needed to address the many non-nuclear issues that threaten regional stability. There is currently no forum to discuss Afghanistan, Iraq, drug trafficking, Persian Gulf security, emergency communications to avoid accidental conflict, and the sources of deep distrust and misunderstanding. Some of these discussions might involve representatives of states that are not part of the P5+1, including governments that have closer relations with Iran. To organize discussion of these broader issues, the US and others should explore the possibility of appointing a special envoy – perhaps a former Chief of State under Un auspices – to engage Iran in new ways. If Obama were to take the lead in reshaping the setting and the process by which the US and others talk with Iran, progress could become easier. The Istanbul talks opened the door to an initial – if incremental – breakthrough agreement. The US now has an opportunity to establish new ways to explore common ground and reach a more durable political solution. Courtesy: Project Syndicate
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US data, Europe woes to set tone NEW YORK
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nvestors will grapple next week with major US economic reports and the looming possibility of a Greek exit from the euro zone, which is likely to keep dragging on equities for weeks to come. As contingency plans are made for Greece’s possible departure from the euro zone, investors may not get a clear picture until Greece holds elections on June 17. As a result, U.S. economic statistics may grab the spotlight during the holiday-shortened week. Major releases include consumer confidence, gross domestic product and on Friday the May non-farm payrolls report, which could provide clues on whether the economy is running out of steam or has simply hit a soft patch. U.S. financial markets will be closed on Monday for the Memorial Day holiday. Corporate news next week is expected to be light, with the first-quarter earnings season largely in the rear view mirror. Among S&P 500 .SPX companies, only government contractor SAIC Inc (SAI.n) is scheduled to report next week.
EUROPE STILL A CONCERN: “We are going to continue to worry about Europe no matter what. That is going to be a concern,” said Peter Cardillo, chief market economist at Rockwell Global Capital in new York. “But with the two main events in Europe not taking place for several weeks, the market will probably concentrate more on the domestic economy and the economic numbers.” But Europe will continue to be closely monitored, with equities affected by any developments in the fiscally troubled region. Increasing worries about the region, coupled with tepid U.S. data, have sent the S&P 500 down more than 5 percent for May. But stocks rose this week. The Dow Jones industrial average .DJI gained 0.7 percent, the Standard & Poor’s 500 .SPX was up 1.7 percent and the nasdaq composite index .IXIC rose 2.1 percent. As the Greek elections draw closer, headlines from Europe could unsettle investors. Belgian Deputy Prime Minister Didier Reynders said it would be a “grave professional error” if central banks and companies were not preparing for a Greek exit from the euro zone. In addition, French banks, which are among the lenders most exposed to
Greece, have stepped up their efforts on contingency plans for the debt-laden country leaving the euro zone, sources familiar with the situation said. JUMPING INTO STOCKS: Any U.S. data in the coming week which points to an economy pulling out of the doldrums could divert attention from Europe and provide investors an incentive to jump into stocks, which have become cheap during the recent pullback. Analysts have pointed to the 1,275 to 1,280 range for the benchmark S&P index, just below the 200-day moving average, as a key level of support the market is likely to challenge. “You are looking at 1,277 on the downside. The market will test it, but when it gets there it is going to hold because there is a lot of money on the sideline that needs to be put to work,” said Ken Polcari, managing director at ICAP Equities in new York. “People are using that number as the entry point, so you will find stability at that level.” Another possible silver lining for investors may be the strengthening of the dollar, which has been a safe haven during the euro zone’s sovereign debt troubles. The dollar index .DXY is up nearly 5 percent for the month, and some analysts feel it could not only help equities
stabilize but spur a move higher. “With sovereign debt default now a possibility, and some form of dissolution of the euro also possible, the hidden positive may be for the U.S. dollar, and U.S. dollar-denominated assets,” said Brad Lipsig, vice president of investments and senior portfolio manager at UBS Finan-
cial Services in new York. “Capital inflows could support U.S. real estate prices, which could help stabilize U.S. banks,” he said. “All of this could help support U.S. stock prices during a difficult period for Europe’s economy. It’s not inconceivable that this dynamic could trigger a rally in the U.S. stock market.”
The seeds of the EU’s crisis were sown 60 years ago CLIVE COOK The arc of Europe’s postwar history is turning toward tragedy. It isn’t just that much of the continent has fallen into a new Great Depression, or that in some countries things will get worse before they get better. It isn’t even that the whole mess was avoidable. It’s that the crisis is dividing Europe along the very lines the European project was intended to erase. Decades of cliches about European solidarity and the European idea are being held up to ridicule. The argument that Britons, Germans, Greeks, Italians and Spaniards are instinctive cultural partners whose commonalities transcend their obvious differences and historical enmities — that “Europe” is a real community, not just a heavily worked-over Brussels blueprint — turns out to be, let’s say, disputable. Ancient stereotypes frame conversation about the crisis. Germans are bossy and severe. Italians are idle. Greeks are corrupt. Brits are arrogant. The French are vain. So much for 60 years of European unification. in particular is coming in for bashing, not just in Greece, where cartoonists have brushed up on their swastikas, but in Italy, Spain and other countries suffering the stress of a German-directed drive to restore Europe’s public finances.
WaLkINg aLONE Until recently, Germany could claim to be expressing the consensus of rich northern Europe, but no longer. In a union that was intended, not least by Germany’s own leaders, to bind and subdue Germany within a larger whole, it instead stands increasingly isolated. Why did it all go wrong? Three main reasons: French grandiosity, German shame and a universal law of . These formed a European Union that was poorly adapted to the stresses the project was sure to encounter. The EU was unlucky that the crisis came when it did - - before national loyalties had diminished and an emerging EU identity had begun to take their place. Yet the EU’s designers had some sense of the risk they were inevitably running. They gambled and lost. The overriding goal for a Europe in ruins after was to create a secure zone of peace and prosperity. Reconciliation between and Germany, formerly bitter enemies and sure to be the dominant economic entities in a new Europe, was vital. As a matter of the highest priority, the two countries formed a close alliance, and began building a new united Europe around it. They started modestly in 1951 with the European Coal and Steel Community, but entertained bigger ambitions at the outset. As early as 1957, the enshrined the notion of “ever closer union.” This became the organizing principle for Europe’s subsequent evolution. The path not taken was that of an enhanced free-trade area, a zone of economic cooperation among sovereign states, a kind of nAFTA-plus. According to France’s thinking, if Europe was to compete and engage on equal terms with the U.S., it would need to aim higher than that. Ultimately, a of Europe was the goal. From an early stage, Europe hoped to integrate politically as well as through trade and commerce. As the European Economic Community came into
being, it took in new members and began to develop a thin yet feverishly proliferating European layer of government, complete with parliament and executive. These two drives were in tension. Members of an ever-widening union had less in common than countries in the advanced-economy core, making political and economic integration ever harder.
a BOLd MOMENT Germany mainly wanted a broader union — to surround itself with friendly states, even if they were at very different stages of economic development than those at the European core. France sought especially a deeper political union, one that would subdue German economic power and give Paris more reach. Compromising, the two former foes chose to broaden and deepen at once. The critical juncture was reached in talks for the Treaty of 1992. This provided for European Monetary Union, the boldest step yet. As you would expect, France was keen on the new single currency: This was deepening with a vengeance. Under then- existing arrangements, French monetary policy was in practice constrained by the choices of Germany’s mighty central bank. France had no vote on the Bundesbank’s board, but its interests would be recognized by the . Back then, it saw monetary union as adding to, not subtracting from, its monetary sovereignty. More gloriously — and what is France for, if not la gloire? — the single currency advanced the goal of a Europe fit to contend with the U.S. in global affairs. The dollar needed a rival. The would be it. A truly single European market, which the EU had resolved to build, needed to eliminate exchange-rate risk, and that required a single currency. What better way to incubate a European sense of identity than to create such a currency? As before, Germany viewed deepening more skeptically. Polls told the government that, had Germany’s constitution permitted a referendum on dropping its esteemed mark, the country would have rejected the idea. But Chancellor Helmut Kohl gave greater weight to other considerations. Germany’s sudden enlargement to the east was stirring concern. Kohl wanted to offer reassurance. This was not , you understand. There’s no going back to that shameful past. See, we’ll surrender the mark to prove it. Germany acquiesced in the annihilation of its currency out of meekness. Yes. That’s ironic.
CENTRaL BaNkINg POLITICS There was another factor, almost as laughable in hindsight. A view had gained ground that central banking was above politics. The goal of was simple — price stability — and the means purely technocratic. The old Keynesian idea that governments could trade a bit of inflation for a spurt of faster growth stood discredited. If choices like that ever arose, central banking would be political; but such choices don’t arise, so monetary policy should be held above the fray. That’s why leaders weren’t too worried that Europe’s democratic underpinnings, including its arrangements for fiscal policy, were so much weaker than those of a typical currency- issuing nationstate. Actually, they thought, this was a good thing.
The EU’s governance deficit would make the ECB all the more independent. Left alone, it could do its job better and without controversy. nice theory. This crisis has proved that central banking is a branch of politics. Under some extreme circumstances, such as the ones we’re in, monetary policy is really just fiscal policy by other means — as when a central bank engages in “quantitative easing” and takes government debt onto its books. Strictly speaking, again to underline its independence, the ECB was forbidden to do that, but out of necessity it has lately found ways around the prohibition. Many economists are now calling for more QE. In addition, with economies across the euro area diverging, the supposed simplicity of the stableprices goal has evaporated. Price stability in Germany means depression in . But the euro area can have only one monetary policy. Setting it involves choices that are as political as they come - - but no clear line of democratic accountability connects the ECB and the EU’s citizens or governments. Central-bank independence aside, economists drew attention to the fragility of the euro system’s design from the start. Most presciently, Harvard’s stressed that as economic performance differed from one country to the next, a single currency would pit winners against losers, and Europe lacked both the political machinery and the democratic legitimacy to mediate these disputes. How he was.
PaSSINg ThE BURdEN The standoff between Germany and its allies with fiscal austerity on one side and the distressed peripheral economies of Greece, Ireland, and on the other comes down to a fight about who bears what burden. German are unwilling to subsidize what they see as their reckless and feckless EU partners. If this reluctance brings the ceiling down, it may do Germany more harm than good. You can understand it nonetheless. Since Europe’s national solidarities look more entrenched than ever, you can also understand resentment in Greece and elsewhere at being dictated to by Berlin. One way of describing Europe’s dysfunction is to say that economic integration, which sped up with the euro’s arrival, got too far out in front of political integration. Although that’s true, you would be wrong to conclude that political integration could have moved much faster. Successive treaties have run into mounting popular resistance to the transfer of decision-making power to the EU. Across Europe, politics is still resolutely national. To many Spaniards, seems remote, let alone Brussels — and a similar mindset applies to most other EU members. For that reason, adopting the single currency was always going to be a risk, but it didn’t need to be as risky as it proved. national governments understood what the economic demands of the euro would be, then spent more than a decade doing nothing about them. Successive Greek governments not only but also cooked the books to hide the fact. Greece was an outlier only in that latter respect. Everywhere, complacency about the safety of sovereign debt was total. For years governments borrowed, and creditors lent, as though Greek (or Italian or Spanish) debt was as safe as Germany’s.
That bad behavior was compounded by the failure to align financial regulation with monetary union. The single currency fostered deep financial integration across the EU — one of the things that make exiting the single currency so difficult. But progress toward a consistent EU-wide system of financial has been slow.
CONTINENTaL dRIfT Labor markets also remain more national than continental, leaving workers and businesses at the mercy of the EU’s imperfectly synchronized business cycles. Migration is permitted in theory, but can be difficult in practice because pension arrangements and labor certifications aren’t easily portable. Anyway, how many Frenchmen want to live in Britain? Or vice versa? Powerful unions and broken wage-setting systems let labor costs get out of hand, and created a widening competitiveness gap between Germany and southern Europe, the main underlying cause of the peripheral countries’ current plight. Until the crisis intervened, labor-market craziness as notorious as Spain’s — where a dual system of permanent and disposable workers has driven the to 25 percent — was left unattended. The EU’s executive arm, the European Commission, is much to blame for this neglect. For years it focused on enlarging and complicating its areas of competence (I’m using the term in its technical sense) but failed to prioritize the issues that would make or break the currency union. Its pathological zeal to standardize product-market regulation fueled resistance to more rule from Brussels — resistance it then deflected by spraying regional development funds hither and yon. Its intrusiveness contrived to be both threatening and absurd. The commission thrived on tasks that neither made the euro system safer nor prepared the EU for the economic stresses of the crash. The ultimate result is the fateful choice that confronts Europe in the coming days and weeks. Already this month, a breakup of the euro system has gone from being unthinkable to becoming a planned-for contingency. The immediate question is whether Greece will exit. Europe’s leaders would hope to stop the rot there. But if a “Grexit” happens, attention will turn instantly to which country goes next. To stop the system unraveling with who knows what consequences, the EU may have to take the strides toward deeper union that Germany has been resisting since this crisis exploded: joint guarantees of sovereign debt and unlimited intervention by the ECB. The problem is, that’s fiscal union. It commits the EU to potentially enormous transfers among its members, and makes them explicit. Can there be fiscal union of that sort without political union? And do Europe’s divided nations — the bossy Germans, idle Italians, arrogant Brits and vain French — actually want to be one country? Back in Maastricht in 1992, the Treaty of European Union arranged things so that those questions would one day have to be answered. Sooner than anybody bargained for, and before Europe was anything like ready, that day has come. Courtesy: Bloomberg