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Banks have so little loss-absorbing capacity that they stand permanently on the edge of disaster.

The eurozone must either make the industry far more robust, by hugely increasing equity capital, or consolidate fiscal capacity and tighten regulation, to ensure adequate eurozone-wide oversight and fiscal support.

While a slide in imports accounts for some of the correction, Greece boosted its exports outside the EU by about 30 percent in the fourth quarter of 2012 from the previous year, while Italy’s rose 13 percent in January from a year ago, he said.

The metamorphosis is known as internal devaluation

Prevented by membership of the euro from driving down currencies, governments and companies are squeezing labor costs to spur productivity.

On average, the periphery is about halfway to eliminating large structural current-account deficits, which allow for declines related to recession-driven weaker import demand, estimates Goldman Sachs (GS).

The OECD today published an index showing that relative labor costs in Spain and Portugal have now dropped below Germany’s for the first time since 2005.

“It’s potentially good for the economy but only if it results in faster investment,”

“If not then there’s a downward spiral risk.”

Willem Buiter, Chief Economist at Citigroup, has been most vocal in predicting that these facilities will be inadequate when Spain and Italy hit the wall and that more extreme measures will have to be taken.

The basic dilemma here is that almost all of the eurozone governments including Germany carry high debt burdens in excess of the Maastricht Treaty. For example, Germany has been in breach of Maastricht Treaty in 8 of 10 years since 2002, has been over the Maastricht 60% hurdle in each of those ten years, and now carries a debt to GDP burden above 80%.

GDP continues to shrink,

Moreover, balkanization of economic activity, banking systems, and public-debt markets continues, as foreign investors flee the eurozone periphery and seek safety in the core.

Likewise, competitiveness losses have been partly reversed as wages have lagged productivity growth, thus reducing unit labor costs, and some structural reforms are ongoing.

The logs are shipped to a mill in San Leandro, California.

The slats are waxed and kiln dried again.

The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces.

Don't overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation.

Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this "wood-clinched" sandwich.

The graphite is mined in Ceylon.

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder-cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are.

Observe the labeling. That's a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black?

My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain. RP.18

An ingredient called "factice" is what does the erasing. It is a rubber-like product made by reacting rape-seed oil from the Dutch East Indies with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives "the plug" its color is cadmium sulfide

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others.

There isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how.

Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me.

There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found.

For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand—that is, in the absence of governmental or any other coercive masterminding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

the ordeal as “not a pleasant experience,” but said, “It only happens every seven years, so we can tolerate it.”

Britain, Sweden and the Netherlands were among the Northern European nations that fought hard to reduce agricultural subsidies and increase spending on research and development to bolster the bloc’s global competitiveness.

The spectacle of European leaders haggling through the night over amounts of money representing rounding errors in their national accounts demonstrated vividly their reluctance to make collective policies that erode their nations’ sovereignty.

“What we’re seeing is that European integration is very important to European leaders as long as it doesn’t imply that someone has to be paying for someone else,”

In late 2008, the Chinese Communist Party began the “1,000 Talents” program, aimed at these supremely talented Chinese. Through a wide variety of terrific incentives — sometimes as much as $1 million — the party has encouraged academic and research institutes, as well as municipal governments, to “bring back the best.”

Most important, it must weaken the power of academic and scientific administrators.

Similarly, in many institutions, promotion depends on your relationship with the dean or senior faculty and not your academic pedigree.

Returnees, or those who hesitate to return, often say that in China, “personal relationships are too complex” – a code for the backstabbing and petty jealousies and the need to cultivate ties with leaders in your own field.

The dispute unfolded in the heated politics surrounding the presidential election, with Mexican growers charging that the Commerce Department was courting voters in the important swing state of Florida. Instead, the timing of the negotiations ensured that the government could win those votes and bring the controversy to a conclusion satisfactory to the Mexicans after the election was over.

The Mexicans enlisted roughly 370 American businesses, including Wal-Mart Stores and meat and vegetable producers, to argue their cause.

For years, China has defended its currency by pegging the exchange rate to the dollar, and the Swiss National Bank now only permits appreciation of the franc up to a certain limit, because investors have viewed the Swiss currency as one of the last safe currencies since the outbreak of the sovereign debt crisis in Europe.

I suspect that, in order to limit country specific shocks, euro members may have to actively use macro prudential tools such as rules on the amount of liquidity that banks should hold, or upper limit to loans to value ratios, much more so that they have in the past.

If the U.S. and a number of other advanced countries are going to decrease their current account deficits, then some countries will have to decrease their current account surpluses. And for this to happen, there has to be, among other changes, an adjustment of the exchange rates. Put more bluntly, most emerging markets have to accept an appreciation.

They have to

Many countries have a tough adjustment to achieve. In doing so, they indeed have to be careful about their social implications. When adjustment requires a decrease in the real wage (or at least a decrease relative to productivity), it is essential that the decrease be fairly shared. You have to make sure that there is a safety net in place. If the pension system has to be made less generous, which is the case in a number of countries, you have to make sure the lowest pensions are protected.

It is clear that adjustment in the Euro zone requires a decrease in the relative price of periphery countries and an increase in the relative price of core countries. If the ECB wants to maintain two percent inflation for the Euro zone as a whole, this implies, arithmetically, that core countries have to have inflation higher than two percent, periphery countries have to have inflation lower than two percent, until the adjustment has taken place.

Unfortunately, often supervisors in charge of the failing entity in the years of the debt run up were the ones charged with uncovering the problems.

Spain was the leader in the introduction of a dynamic provision – a provisioning tool that forces banks to increase provisions without reference to any specific loan. The intention of this tool was twofold: to mitigate the bad times, and to cool the booms in the good times (Holmstrom and Tirole 1997). Dynamic provisions were endorsed as part of the Basel III standards in December 2010, in part on the strength of Spain’s experience. And indeed the existing evidence (Jiménez et al. 2012) shows that the tool worked as intended, dampening the credit boom and softening somewhat the credit crunch. However, it is clear by now that their level was not nearly enough, as their size – 3% of GDP at their highest point (2004) – was simply not of a magnitude commensurate with the credit losses.

Without the provisions, the reality of the cajas' accounts would have become much faster a concern, and would have imposed itself on the regulator

Had the Banco de España ordered an audit of the system after uncovering numerous irregularities in CCM, it would have not been able to deal with the capital shortfalls uncovered as there was no appropriate resolution regime in Spain at the time

governance played a critical role in the development of the Spanish crisis. In the Spanish case, the supervisor, confronted with powerful and well connected ex-politicians decided to look the other way in the face of obvious building trouble.

More systematic evidence of the role played by these governance issues is provided in a 2009 paper (Cuñat and Garicano 2009b) where we showed that cajas with chief executives who had no previous banking experience (!), no graduate education, and were politically connected did substantially worse in the run up to the crisis (granting more real estate developer loan, up to half of the entire loan book in some instances) and during the crisis (with higher NPLs).

Such disparities of demand conditions will undoubtedly persist in the future because European countries differ substantially in industrial composition and in a variety of economic policies.

EMU is meant to be a marriage made in heaven with no possibility of divorce.

The ECB stepped into the void left by foreign investors pulling their savings out of these current account deficit countries by lending their banks more money.

When large capital flight to Germany occurred before the euro’s introduction, the deutschemark would appreciate against other European currencies. While pegged against the deutschemark, these exchange rates were still flexible. That flexibility disappeared with the euro. When capital flight occurs today, the Bundesbank effectively ends up with loans to the other national central banks that are reflected in the TARGET2 claims on the Eurosystem. 

Debt overhangs persist, growth is mediocre and the governance structure – a common monetary policy without a centralized fiscal policy – is a challenge.

The ECB has allowed banks to borrow as much money as they want for up to three years. Indeed, at the end of February banks were borrowing €1.2 trillion from the ECB, twelve times the amount of their required reserves. With so much excess liquidity in the money markets, further capital flight is likely to cause a disproportionable share of this money to end up in Germany

Concerned about the stability of the euro, Germany’s savers are shifting their money into real estate. German residential house prices and rents rose by 4.7% last year, the fastest increase since 1993’s reunification boom. So far, Germans are not leveraging to buy houses. Growth in German mortgages is paltry at just 1.2% per annum according to the ECB as of December 2011, but in our view all ingredients for a debt-financed house price boom are there. Distrust in the euro is rising,

The ECB’s generous monetary policy will delay the internal devaluation adjustment of the eurozone’s current account deficit countries.

Mexico’s current account deficit fell by 5.3% of GDP in 1995, according to Haver Analytics, in the wake of capital flight following the government’s decision to float the peso in 1994, while its recession lasted only one year.

Bank of France Governor Christian Noyer told journalists in Paris last week that “whatever happens in Greece” won’t place any French financial institution in difficulty.

What’s changed is that banks in the so-called core EU countries of Germany, France and the U.K. used funds from the ECB in December and February to insulate their southern European units against losses should one or more country exit the euro. “If you’re a U.K. lender and you’ve lent 10 billion euros to your Spanish subsidiary and Spain exits, you’re suddenly only going to get paid back in 50 percent devalued pesetas and you’re on the hook for 5 billion euros,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.

One way multinational banking groups are mitigating that risk is by replacing their own funding lines to subsidiaries in the region with ECB loans. Deutsche Bank, Europe’s biggest bank by assets, tapped “a small amount” of ECB cash to help fund corporate and retail business in continental Europe, where it has sizeable operations in Italy and Spain. BNP Paribas, Europe’s third-biggest bank, used the programs to help fund its Italian unit as it reduces intergroup backing.

European banks also have cut their sovereign-debt holdings and exposures to Ireland, Italy, Spain and Portugal.

ermany, France and the U.K. reduced exposure to Greece by more than half in the two years through the end of 2011 to $68.2 billion, BIS data show.