Eurozone 1% Shell Game Stimulus Mirage; Meaning of Necessary; "Real" Stimulus

Germany, France, Italy, and Spain have agreed to spend 1% of GDP on new stimulus measures.

Where is the money coming from? They will not say. Most likely from somewhere else, better known as nowhere.

The Guardian reports Eurozone big four pledge 1% of GDP to underwrite banks and stimulate growth.

The leaders of the eurozone's biggest economies announced on Friday night that 1% of the European Union's GDP was to be set aside to help the continent grow its way out of the financial crisis. But doubts were immediately expressed as to what share of the package – said to be worth €130bn (£105m) – would be genuinely new money.

After several hours of apparently tense discussions, there was no immediate agreement on a plan outlined by Italy's prime minister, Mario Monti, on Thursday, aimed at stabilising Europe's banks and protecting countries under attack in the markets.

"There was an agreement between all of us to use any necessary mechanism to obtain financial stability in the eurozone," said Mariano Rajoy, the Spanish prime minister, afterwards.

But the German chancellor, Angela Merkel, insisted that the EU must take full advantage of the instruments already at its disposal. Her remark suggested she is wary of two new funds – to guarantee bank depositors and as a lender of last resort to ailing banks – understood to have been on the agenda at Friday's talks.

In a sign that tempers are becoming increasingly frayed before next week's crucial summit, the normally gentlemanly Monti used his closing remarks to attack France and Germany publicly.

Nicholas Spiro, of Spiro Sovereign Strategy, said: "The pact has a shuffling of the deckchairs feel to it."

Meaning of "Necessary"

I added emphasis to the word "necessary" in the above clip. However, I cannot take credit for it.

Instead, credit goes to Financial Times writer Martin Wolf for his column The G20 on the eurozone and fiscal policy

This week’s G20 communiqué dealt with the eurozone. Let us examine it closely.

“Euro area members of the G20 will take all necessary measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks.”

 The crucial word here is “necessary”. We can safely say that agreement on what this means is altogether lacking.

Real Stimulus

There is no stimulus plan. It's a shell game. No new funds have been promised for stimulus. Rather, previously earmarked funds will simply be given that label.

Bear in mind that I am not in favor of stimulus plans anyway, at least monetary ones.

The best stimulus plan Europe and the US could possibly do is modify work rules making it easier to fire (and therefore hire) workers, scrap prevailing wage laws, end collective bargaining of public unions, scrap tariffs, and eliminate farm subsidies.

Instead, France is taking a giant step backwards as noted in Hollande About to Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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