| Good News: EU Budget Talks Collapse, France Rejects Compromise; Still Time to Snatch Defeat From Jaws of Victory Posted: 15 Nov 2012 08:42 AM PST I have a bit of good news today. The efforts of European Council president Herman Van Rompuy to mollify the UK and other budget hawks have created such a stir that France rejects EU budget compromise. Jean-Marc Ayrault, the French prime minister, objected to deep cuts to agriculture spending included in the proposal, but also expressed displeasure with reductions in the development money, known as cohesion funds, that benefit poorer regions.
The biggest object of displeasure appeared to be Mr Van Rompuy's move to trim €25bn from the common agricultural policy – traditionally France's biggest priority – compared with a proposal from the European Commission, the EU's executive arm. Those cuts include a €12bn reduction in direct subsidies to farmers.
Some analysts argue the cull was even more dramatic because agriculture was starting from a low base – historically speaking – in the commission proposal.
Agriculture is not France's only concern. Cuts to the cohesion budget look set to fall disproportionately on its own regions, which tend to be bastions of support for François Hollande, the socialist president.
Paris may also have been stung by Mr Van Rompuy's decision to endorse the UK rebate, the burden of which falls disproportionately on French and Italian taxpayers. Under the proposal, the rebate would be modified so that the UK and Germany – currently exempted – would have to pay a share of the British rebate.
Bernard Cazeneuve, France's Europe minister, said on Wednesday that France was against the continuation of budget rebates for countries such as the UK, Germany, the Netherlands and Sweden. "We don't want these rebates to continue because they represent an anti-European way of thinking," he said. Good News Talk is now so cantankerous that EU budget talks collapsed completely. This is not only good news, it's excellent news. Half the EU budget is dedicated to a preposterous system of crop supports as noted in my post Common Agricultural Idiocy. The sooner the CAP blows sky high, the better off citizens in Europe will be. Bear in mind the fallback position of the EU is an automatic budget increase of 2% if no agreement is reached. Should an automatic increase happen, UK prime minister David Cameron may be forced into an up-or-down vote on UK membership in the EU. As it sits now, British citizens would reject the EU, as it should. Self-Serving Brussels Nannycrats The Telegraph explains ... David Davis, a former shadow Home Secretary, condemned the "self-serving, inflation-busting bonus for Brussels" that would force Britain to pay an extra £1.3 billion next year in annual EU contributions, on top of the existing £11 billion.
Writing in the Daily Mail, he warned: "If the EU Commission gets its way, British taxpayers will soon be handing over £22,000 to Brussels every minute. It is time for EU institutions to experience the austerity they happily recommend to member states.
"It's certainly not hard to find savings, given that the EU's 2012 budget is £105 billion – four times what our government will spend on defence this year."
If no deal is signed by the end of next year, the EU budget will rise automatically by two per cent. Still Time to Snatch Defeat From Jaws of Victory The bad news is the EU still has some time to work this mess out, and Cameron may not put the EU to a vote if a compromise is reached. In the meantime, just remember, the more bickering the better. Anything that cuts the power and the budget of the nannycrats in Brussels is a good thing. The sooner this mess blows sky high the better. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 
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| Hostess to Liquidate if Bakers' Strike Continues Through Thursday; End of Twinkies Hours Away? Posted: 15 Nov 2012 07:33 AM PST It's do or die for 18,000 Hostess workers including 5,000 in the bakers' union. Hostess, the maker of Twinkies, Ding-Dongs, Ho-Ho's, and Wonder Bread has given the union a firm order to accept wage cuts, else the company will liquidate. Only fools would voluntarily vote for liquidation, but with the clock ticking down to mere hours to come to agreement, it appears the fools will win the day. Please consider Hostess to liquidate if bakers' strike continues through Thursday. Hostess Brands said Wednesday that it will go into liquidation unless bakers striking in protest against a new contract imposed in bankruptcy court return to work by the end of the day Thursday.
"We simply do not have the financial resources to survive an ongoing national strike," Hostess CEO Greg Rayburn said in a statement.
The liquidation would result in Hostess' nearly 18,000 workers losing their jobs. The bakers' union represents around 5,000.
The union did not immediately respond to a request for comment Wednesday, but has called the concessions demanded in the new contract "outrageous."
"Our members are on strike because they have had enough," bakers' union president Frank Hurt said in a statement Tuesday. "They are not willing to take draconian wage and benefit cuts on top of the significant concessions they made in 2004 and give up their pension so that the Wall Street vulture capitalists in control of this company can walk away with millions of dollars." End of Twinkies? The bakers' union would rather have no job than reduced wages. Lovely. Good luck finding another job in this environment. I have little sympathy for those who voluntarily walk away from their jobs in these trying times. However, this is probably not the end of Twinkies, Ding-Dongs, or Ho-Ho's. Not that anyone needs to be eating such non-nutritional junk food, but those names and recipes will likely be sold and produced elsewhere, probably at a lower cost to consumers, especially if the buyer does not have to deal with the bakers' union. The union will likely have to deal with the Pension Benefit Guarantee Corporation (US Taxpayers) and I expect massive haircuts in their plan (as well as screams from the union when it happens). Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com 
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| Spain's Unpleasant Choice: Accept Lower Wages and Still Higher Unemployment, Leave the Euro and Default Posted: 14 Nov 2012 11:32 PM PST On the near 100% probability that Germany will not voluntarily give money to Spain, nor will Germany voluntarily modify its trade policies, the choices facing Spain are quite bleak. Michael Pettis, writing for Carnegie Europe describes Spain's unpleasant choices in Spain Will be Forced to Choose. In the great debate over the economy we sometimes forget the simple arithmetic of economic rebalancing. This arithmetic, like it or not, severely limits the options open to Spain.
t is easy and popular to blame the greed of the Spanish and the stupidity of the government for the mess in which Spain has found itself, but the policies Germany put into place in the late 1990s guaranteed that Germany, a country that had run massive trade deficits in the 1990s, would run equally massive trade surpluses in the subsequent decade.
Because once they joined the euro the rest of Europe had no control over the value of their currencies and the level of their interest rates. It was inevitable that European countries that had joined the euro with a higher-than-average level of inflation would be forced to respond to German trade surpluses either by forcing up unemployment or by running the large trade deficits that corresponded to Germany's trade surplus. No other choice was possible.
These deficits, as a matter of economic necessity, had to be financed with loans from Germany, leaving Spain with an enormous debt burden. Just as Spain could not run a trade deficit without borrowing from abroad, Spain can only repay its debt if it runs a trade surplus. What is more, since rich Spaniards are taking enormous amounts of money out of the country in order to protect themselves from the debt crisis they know is coming, the Spanish trade surplus must be large enough to accommodate both flight capital and debt repayments.
In practice there are only three ways Spain can achieve a sufficiently large trade surplus. The first way requires that Berlin reverse those policies that forced a German trade surplus at the expense of its European neighbors. Berlin must cut taxes and increase spending so much that Germany runs a trade deficit large enough to allow Spain to run the opposite surplus, which it must do if it hopes to repay the debt.
If Germany does not move quickly to reverse its trade surplus, Spain only has two other ways of creating a trade surplus in spite of German recalcitrance. One way requires that Spanish wages are forced down by many years of high unemployment. This will allow Spain to run a sufficiently large trade surplus.
Spain's second option is to leave the euro and devalue. This will immediately force down prices and wages relative to Germany.
Neither option will be easy, but it is important that we realize that if Germany doesn't adjust, Madrid has no choice but to pick one or the other. Both options will cause debt to soar in real terms, and will probably force Spanish businesses, and even the government into default. But in both cases Spain will begin running large trade surpluses.
As much as leaders in Madrid, Brussels, and Berlin hate to admit it, these are the only three options open to Spain. Any policy proposed by policymakers that is not consistent with one of these three ways will be impossible to achieve. Simple Math The only good options from Spain's point of view are for Germany (or Germany and France) to bail out Spain with free money (not a loan) or for Germany to go on a massive sustained spending spree (no doubt accompanied by higher inflation), such that Germany's trade surplus turns into a deficit. However, those are not options Spain can choose. Those are options that only Germany can choose. The odds Germany voluntarily selects those options are roughly zero percent. Spain gets to decide between these two choices - Lower Wages Coupled With Still Higher Unemployment
- Leave the Euro and Default
For now, Spain has selected choice number one. How long can it last? Yesterday I wrote Looking Ahead, Spain Worse Than Greece; Only One Realistic Solution. The realistic solution of course is to " leave the euro and simultaneously undertake structural reforms" but in spite of 25.8% unemployment, Spain still sees things differently (for now).
Brussels Blinks The nannycrats in Brussels are starting to get worried because following massive protests in Spain, Portugal, Italy, Greece, and Belgium, the nannycrats decided Spain will not need further austerity measures in 2013. For details please see Anti-Austerity Protests Sweep Europe, Sparking Violence; Brussels Blinks, No Further Austerity for Spain; Economic Burnt Toast However, a one year suspension in austerity is not going to do a thing for Spain in the long run. Greece has missed budget target after target (see Greece Allegedly Gets Time, Not Money; Mish Says Time Is Money) and Spain is following smack down the same path. Eventually Spanish citizens will have had enough and will force a change. The only question is how much pain Spanish citizens can take before that happens. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com "Wine Country" Economic Conference Hosted By Mish Click on Image to Learn More  
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