Mish's Global Economic Trend Analysis

US, EU Wage Economic War on Iran; Greece Lifts Objection to Oil Embargo; Warmongers United; Will Cooler Heads Prevail?
Brussels Recommends Sucking Spain Dry with Increased VAT; France to Raise Sales Tax to Protect Jobs; Is There Any Point or Reason for the Eurozone?
"Social VAT" Trade Wars Heat Up Between Spain and France
What is Greece's Least Bad Option?

US, EU Wage Economic War on Iran; Greece Lifts Objection to Oil Embargo; Warmongers United; Will Cooler Heads Prevail?

Posted: 04 Jan 2012 09:31 PM PST

One might think the US and EU would have enough economic problems already to risk oil soaring to stratospheric heights by an embargo of Iranian oil.

Unfortunately, common sense never gets in the way of bureaucrats and fools or their foolish missions.

Bloomberg reports EU Governments Moving Closer to Iran Oil Embargo as Greece Lifts Objection

European Union governments moved closer to halting oil purchases from Iran, stepping up the confrontation over the Islamic republic's nuclear program.

EU foreign ministers are aiming to announce harsher sanctions on Iran's energy and banking industries at their next meeting on Jan. 30 after Greece lifted its objections to an oil embargo.

"We want to tighten sanctions on Iran -- the things that have been mentioned are the oil sector and the financial sector," EU spokesman Michael Mann said by telephone in Brussels today.

French Foreign Minister Alain Juppe said in Lisbon today that he hopes a decision about an embargo on Iranian oil exports may be adopted at the Jan. 30 meeting of foreign ministers.

The U.S. today welcomed the push toward an embargo.

"This is consistent with tightening the noose around Iran economically," State Department spokeswoman Victoria Nuland said at a briefing in Washington. "The place to get Iran's attention is in the oil sector."

US, EU Wage Economic War on Iran

By some misguided thinking it is OK for the the US to block Iranian oil but not OK for Iran to defend itself or retaliate.

As far as I am concerned, an embargo is an act of war, and only Congress can declare war.

Thus, one seriously has to wonder if the the US is purposely attempting to goad Iran into blocking the Strait of Hormuz, just so the US can flatten Iran.

Warmongers United

Flushed with the "success" of wasting trillions of dollars in Iraq, fighting weapons of mass destruction that did not exist, the US now wants to do the same to Iran.

Oil is Fungible

The best news out of this mess is that oil is fungible, and perhaps embargo disruptions are already priced in. Regardless, as long as Iranian oil gets through, anywhere, prices will not get out of hand.

With that in mind, it would not surprise me one bit to see China send ships to the Gulf, stating flat out that China will defend its right to not have the US interfere with China's oil needs.

Will Cooler Heads Prevail?

I would love to see someone cram this illegal action so far down Obama's throat it makes him puke. The only problem I see with China asserting Iran's right to ship oil (and it's quite a major problem), is that such actions by China could lead to WW III, just what neocon nutcases want.

By the way, the only candidate from either party against these illegal military and economic actions is Ron Paul.

In an addendum to my Predictions for 2012, under the category of Energy, I stated "My prediction is cooler heads prevail."

Perhaps I will be quite wrong on that particular call, quite soon.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Brussels Recommends Sucking Spain Dry with Increased VAT; France to Raise Sales Tax to Protect Jobs; Is There Any Point or Reason for the Eurozone?

Posted: 04 Jan 2012 11:13 AM PST

Political hacks are on a roll in Brussels. Spanish unemployment is 22.8%, yet Brussels recommends Spain hike its VAT.

Via Google Translate, please consider Brussels Again Recommend Rise in Spain's VAT

The European Commission hopes to discuss in the coming weeks with the new government of Mariano Rajoy new fiscal consolidation measures to compensate for the deviation from the deficit target in 2011 that could exceed even the 8% vs 6% agreed, and has advanced the VAT increase is one possibility among others.

"We were informed last week by the Spanish authorities of a sizeable deficit, which should be 6% in 2011 and might be about or more than 8% according to latest statistics we have received from Madrid. At the moment, we have no elements to confirm these figures. We are not in a position to state here that the figure will be higher or lower than 8%, "said at a news conference the European Commission spokesman, Olivier Bailly.

Asked whether Brussels remains the recommendation for Spain to raise the VAT, the spokesman insisted that "Spanish authorities are responsible for deciding planning to take other measures to offset the deficit diversion in order to meet the target of 3% in 2013 who are committed to comply ", but insisted that raise VAT is one of the recommendations of Brussels.

"We made several recommendations in the past, including last June. The VAT is one of them. There are many others," explained without going into details.

Raising taxes in the midst of an economic depression (which Spain is in), is pure insanity. Tax hikes will suck dry the already slim chance of a Spanish recovery.

France to Raise Sales Tax to Protect Jobs

Eurozone economic insanity is staggering as this update on the "Social Vat" tax proves. Please consider France Plans To Raise Sales Tax, Following Germany's Lead

French President Nicolas Sarkozy's government said Tuesday that it would borrow yet another page from Germany's economic textbook in a bid to make France's products more competitive and finance the nation's wide-reaching and heavily indebted social-welfare system.

The proposal, which the government said would be implemented before this spring's presidential election, calls for reducing the amount companies contribute to the state-run health-care and pension systems. To make up for the lost income, the center-right government would raise France's value-added tax--a levy similar to sales taxes in the U.S.--which is currently as high as 19.6%.

The government says the measure, often referred to as "social VAT," would act as a powerful tool to protect French jobs, which are increasingly being relocated to lower-cost countries.

French companies would enjoy lower labor costs, while imported products--which would share the higher VAT burden--would help finance France's welfare system. The country's state-run health-care and pension systems are expected to have recorded a combined deficit of EUR18 billion ($23.3 billion) last year.

Social VAT "is good for France and it is good for jobs," French Labor Minister Xavier Bertrand told France 2 television.

Germany increased VAT to 19% from 16% in 2007 to shift part of the burden of social welfare onto consumers.

"Social VAT is antisocial because it is the consumer that will pay," Socialist Party spokesman Benoit Hamon said.

The French VAT proposal comes as Sarkozy struggles against rising unemployment, a slowing economy and a surging trade deficit that is projected to have reached EUR75 billion last year.

"We shouldn't talk nonsense," Jean-Claude Mailly, the secretary-general of Force Ouvriere, France's third-largest labor union, said on French radio. "It's not with one or two points of VAT that we will compete with Chinese products."

Moreover, as France can't get near China's labor costs, social VAT would be more of a competitive assault on France's euro-zone neighbors.

The measure is equivalent to a currency devaluation because it effectively increases the price of imports and decreases the price of exports. In the past, France repeatedly devalued the franc against the mark to make its economy more competitive.

If other countries followed suit, inflation would still be pushed up without any gain in competitiveness, said Eric Heyer, economist at the OFCE, the French economic think tank.

"We created a single currency to avoid competitive devaluations," Heyer said.

Is There Any Point or Reason for the Eurozone?

"We created a single currency to avoid competitive devaluations". Indeed, that was one purpose wasn't it? The other purpose was to increase trade. Now France is imposing a sales tax specifically to protect French jobs from Spanish competition.

Just how is Spain supposed to pay back French and German banks if other European countries seek to block Spanish exports?

I suggest Spain should not even try. It is futile. Since, Spain is going to leave the Eurozone anyway, it would be better to do it sooner rather than later as these actions by France proves.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

"Social VAT" Trade Wars Heat Up Between Spain and France

Posted: 04 Jan 2012 08:10 AM PST

Trade wars are on the horizon everywhere I look. Election politics have brought them to the forefront in France.

Via somewhat choppy but understandable Google Translation, please consider France to Increase the 'Social VAT' Before the May Presidential Election

The French government intends to implement the so-called 'social VAT' levied on products imported from countries with low production costs in order to apply a reduction in social contributions, before presidential elections next spring, as confirmed Budget Minister and government spokesman Gallo, Valérie Pécresse.

"The social tax to create jobs in France and to prevent imported products sold in our country at low cost is going to apply, and we will do before the presidential election," he said Pécresse told France Info.

The minister also said that this Budget proposal will be discussed with the French unions in the social summit is scheduled to be held on 18 January at the Elysee Palace.

In this regard, Bertrand defended the implementation of this measure by the "general interest" of employment and the country, and stressed that in France there are "too many burdens on the job." As an example, said that for every $ 100 of gross wages, account charges 39 euros in Germany, while France is 50 euros.

"I prefer to penalize imports, which have long criminalized the financing of social protection is now to finance social protection", had an impact.

Opposition criticism

Sarkozy's proposal to establish the social tax, announced in his speech on December 31 has been widely criticized by the opposition, including the Socialist Party, which sees as a "social and economic mistake."

Social and Economic Mistake

The interesting thing is the Socialist Party understands the proposal to be a "social and economic mistake" (which of course it is).

When attempting to buy votes, no one cares about mistakes of any kind, and unfortunately private citizens (not politicians) suffer the consequences.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

What is Greece's Least Bad Option?

Posted: 04 Jan 2012 12:24 AM PST

Inquiring minds might be wondering what is the best way forward for Greece. To some extent, the question is akin to asking "would you prefer to lose a one hand and one eye or your left leg?"

I have been thinking about the Greece "least bad" question for quite some time, but what brought about this post is a "by the editors" article on Bloomberg.

Please consider Greece's Least Bad Option Looks to Be Internal Devaluation: View

Greece and some other euro-area economies face years of financial struggle even if they manage to restructure their debts. Their prospects are so bleak that, according to one school of thought, they would be better off outside the euro system, despite the immediate costs of leaving.

We disagree, and not just because the immediate costs of an exit would be enormous. Even after that penalty was paid, resurrecting national currencies and regaining control of monetary policy would create as many problems as they solved.

....

Inside the system, the peripheral countries have learned a harsh lesson: They must hold growth in wages to the euro area's rate of inflation plus any increase in national productivity. In countries such as Greece, this demands a new approach to wage bargaining by employers and unions. Overall, though, it should be no more difficult than managing a floating currency. And on this path the reward for success is greater: lower inflation rates and, with luck, faster economic growth.

None of this alters the fact that Greece, so slow to learn the new rules, would have been better off not joining the euro system in the first place. But it did join, and its best bet now is to make it work.

Bloomberg Right About One Point

Bloomberg is right about one thing, that Greece should not be in the Eurozone. However, Spain, Portugal, Ireland, Italy, France, and Germany should not be in the Eurozone either.

In short, the Eurozone is a fatally flawed mechanism doomed to failure. No country should be in the Eurozone, as constructed.

Some may disagree with that prognosis, but even if they are correct, what is the likelihood that German voters and the German supreme court will ever accept the "transfer union" that can make the Euro ever work?

For the sake of argument let's assume 25%.

Now, in the current state of European politics (and more importantly Greek politics), what are the odds Greece can stick with the mandates set by the Troika?

Once again, for the sake of argument, let's assume 25%.

For the record, I think both of those are on the high side, but assuming both happen, the odds Greece stays in the Eurozone are .25 * .25 or 6.25%.

Regardless of how one calculates the odds, the same arguments that Bloomberg makes today could have been made (and were made by many parties) two years ago, a year ago, six months ago, and two months ago.

Water Under the Dam

At every critical juncture, the consequences for Greece to "stay in the Eurozone" have done nothing but get worse. The lesson here is the sooner a country tells the EMU to "go to hell", the better off the consequences.

That is all water under the dam. The question is "what to do now?"

Clearly if Greece is going to exit (and I think it will), the sooner the better. However, let's ponder the 6.25% chance that the Eurozone stays intact, including Greece.

Greek Exit Means Hyperinflation, Staying in a Decade's Long Depression

If Greece exits the Eurozone, I suspect Greece would enter a period of hyperinflation. The country and the Drachma will be ruined. On the other hand, if Greece stays in the Eurozone, it will face decades long austerity measures and a permanent depression for a decade.

At least in the former case, Greece may get this over and done with in a time-frame of 2-3 years.

Is that outcome worse than massive austerity measures and a permanent depression for a decade, in which Greek voters may decide at any time they have had enough?

Perspective of the EMU

From the perspective of Greece, the best approach was to exit 2 years ago, 1 year ago, six months ago and now.

Interestingly, the same applies for the rest of the Eurozone. Had Greece left two years ago the consequences on the Eurozone banking system may have been 40 billion Euros. In an attempt to prevent what now appears inevitable, the Troika responded with a 100 billion Euro bailout and now needs a second bailout of at least equal size.

Will another 100 billion Euro bailout help? 200 billion? 500 billion? How? And at whose expense?

Moreover, even if bailouts could in theory help, will Greece be able to stick with the austerity plan (and resultant depression) for a decade?

Conclusion

The worst option for Greece and the banks is for Greece to stay the course for years (as it has) then eventually give up (which it will).

The best option from the point of view of Greece (as well as the EMU) is for Greece to default and kiss the Eurozone goodbye, right now.

Unfortunately, misguided politicians, Eurocrats, ECB officials, and analysts have gotten in the way, with dire consequences for Greece, European banks, and the entire Eurozone.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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