EUOBSERVER / BRUSSELS - Finance ministers from the 16-member euro area rejected on Monday night (8 June) French proposals to weaken the budget deficit rules that underpin the common currency area and reconfirmed their support in the European Commission as the principal watchdog.

"We all agreed that the [European] Commission has to be the guardian of the Stability and Growth Pact," Spanish Finance Minister Elena Salgado Mendez said of the rules while speaking to journalists in Luxembourg after the meeting.

Christine Lagarde recently called for a softening of the rules underpinning the euro

Economy commissioner Joaquin Almunia said the pact - softened in 2005 due to pressure from the French and German governments - was already sufficiently flexible to allow the necessary stimulus spending to boost the economy.

Mr Almunia added that it was important for governments to get an idea of when the current stimulus spending was going to stop and the move to improve balance sheets would start.

BERLIN -- The European Union is an extraordinary experiment in shared sovereignty, creating a zone of peace that now stretches from Britain to the Balkans. The union of 27 countries is the world's most formidable economic bloc, incorporating 491 million people in an integrated market that produces nearly a third more than the United States.

But the global economic crisis has made it clear that Europe remains less than the sum of its parts.

The crisis has presented the European Union with its greatest challenge, but even many committed Europeanists believe that the alliance is failing the test. European leaders, their focus on domestic politics, disagree sharply about what to do to combat the slump. They have feuded over how much to stimulate the economy. They argue about whether the European Central Bank should worry more about the deep recession or future inflation. And they have rushed to protect jobs in their home markets at the expense of those in other member countries.

Euro-zone finance ministers have agreed to rein in their ballooning budget deficits if the economy begins recovering as expected next year. 

"Everybody agrees that we need an exit strategy," EU Commissioner for Economic and Monetary Affairs Joaquin Almunia told journalists after the ministers met in Luxembourg on Monday.

"We need to orient our public finance consolidation towards a sustainable position over the medium term," Almunia said. "The moment we start implementing these exit strategies will be the moment our recovery gains traction." 

He added that EU economies would begin showing positive GDP (gross domestic product) figures in the second and third quarters of 2010.

Germany's Arcandor, which owns 53% of Thomas Cook, has filed for bankruptcy protection after the German government rejected a request for loan guarantees.

Arcandor, which employs about 70,000 people, had sought 650m euros ($930m; £561m) of guarantees because about 600m euros of its loans need refinancing.

Arcandor said its bankruptcy filing covered German retailer Karstadt and its mail-order businesses.

However, it added that Thomas Cook would "remain unaffected".

Ten financial groups including JPMorgan Chase and Goldman Sachs were on Tuesday allowed to repay a combined $68bn to the US Treasury in a move that marks a turning point in the economic crisis but formalises the divide between healthy and fragile banks.

The companies, which also include Morgan Stanley and American Express, can now shed the restrictions on pay and hiring that came with the troubled asset relief programme launched last year at the height of the turmoil in global markets.

However, the move raises questions over the competitiveness of other big banks such as Citigroup and Bank of America, which have not yet been allowed to repay the combined $90bn in Tarp money they have received. <...>

The repayment by the 10 institutions, which stepped up their campaign to be free of Tarp after Congress introduced constraints on bankers' pay, is a sign of stability in the financial system. The S&P Financials index has more doubled since March.

"This is not a sign that our troubles are over; far from it," President Barack Obama said. "The financial crisis this administration inherited is still creating painful challenges for businesses and families alike.  But it is a positive sign." ...

But this new form of ersatz capitalism, in which losses are socialized and profits privatized, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity - and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so

America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance, and now to automobiles, with no end in sight. In truth, this is not socialism, but an extension of long standing corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others.

This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate, and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.

LONDON -- Treasury Secretary Timothy Geithner is set to unveil his much-anticipated guidelines on investment banking pay this week. But he may be too late to influence the free-wheeling pay practices at Citigroup, which has been a big recipient of taxpayer funds worth $45 billion and counting.

In a bid to attract talent, Citigroup ( C - news - people ) has been paying traders in London guaranteed bonuses totaling millions of dollars. Among the lucky recipients are Rachel Lord, an executive in Citi's equities group, and Stefanos Bitzakidis, who is listed on Bloomberg as global head of exotic equity derivatives. The two received a total of roughly $3 million in guaranteed bonuses to join Citigroup from Morgan Stanley this year, says a person familiar with the situation. They are among a number of traders in Citi's equities division who have received guarantees to join the firm in recent months.

CRITICS have pummeled the Treasury Department's Public Private Investment Program, which is to buy distressed assets from banks, for seeming to benefit Wall Street at taxpayers' expense. But it doesn't have to be that way. With some revisions, the Treasury could deliver a plan that makes private investors' goals the same as taxpayers'. We've done it before. During the savings and loan crisis of the 1990s, entities called aligned interest partnerships disposed of the toxic assets, largely real estate-related, of S.&L.'s managed by the government's Resolution Trust Corporation.

Here's how it worked: The government contributed assets to a partnership that was financed by a private investor. The investor managed the partnership, and both sides shared the proceeds. Thus the government maintained a financial interest in the success of the partnership. This is a sharp contrast to the Treasury plan, where the selling bank disposes of the asset outright, with no chance of future profits.

The partnership model worked. When all was said and done, private investors recovered more than 125 percent of the assets' initial estimated value. But taxpayers were the ultimate winners. Compared with similar assets sold outright, the government got up to 45 percent higher returns using the partnership structure. Since then, we have used similar structures for transactions like sales of on-base housing for the United States Air Force and sales of military-grade scrap metal for the Department of Defense.

Several factors contributed to the success of the aligned interest partnerships. First, the investors received no fee for managing the assets. This reduced the temptation to sit on assets just to maintain a stream of easy payments from the government. The chief executive was paid entirely out of the investors' share of overall proceeds.

The private investors were free to manage the assets as they chose, with no daily oversight. Instead, investors provided monthly documentation that they were obeying the partnership's rules. But since the private investors got paid only on net receipts, they had a strong incentive to operate efficiently.

According to a report in the May 30 edition of the French newspaper, Le Journal du Dimanche, the Sarkozy government has authorized spending of an estimated €1 billion  to buy vaccines allegedly to combat or protect against H1N1 Swine Flu virus. The only problem is that to date neither the WHO nor the US Government's Center for Diseases Control (CDC) have succeeded to isolate, photograph with an electron microscope and chemically classify the H1N1 Influenza A virus. There is no scientifically published evidence that French virologists have done so either. To mandate drugs for a putative disease that has not even been characterized is dubious to say the least.

26K cases (of which mortality rate is ?%) worldwide (73 countries) is a pandemic? Is this story verifiable?

Diversity is the key to economic and political evolution.

After sketching the current situation with falling asset prices and incomes in the face of high debt loads Rob Parenteau notes the historical patterns of default, bankruptcy falling prices and falling purchases which lead to social dislocations. He notes that Hyman Minsky's description of these patterns, based on work by Keynes and Fisher has been ignored in favor of theoretically self-equilibrating markets by mainstream economists.

The response to recent dislocations in many countries has been to a) increase fiscal deficit spending to both meet the surge in desired private net saving and reduce solvency uncertainty for key financial institutions, while b) reducing policy rates to near zero and expanding central bank balance sheets through purchases of privately held assets (quantitative easing). Market self-adjustment mechanisms that can otherwise lead to market self-destruction are thereby believed to have been short circuited. A "corridor of stability" is being re-established as the guard rails of fiscal and monetary policy have been buttressed.

This time around, however, it may be more complicated than that. Two questions arise with regard to the policy fix underway: who is going to accumulate the issuance of government debt associated with large (and possibly prolonged) fiscal deficit spending, and are there inconsistencies introduced by pursuing a large quantitative easing approach at the same time?

The nub of the policy challenge is as follows. Central banks have dropped policy rates to zero and they have begun purchasing government debt, MBS, and even corporate debt while expanding their balance sheets. Their aim is clear: reduce the cost of private borrowing, and raise the price of less liquid assets by lowering the return on the most liquid assets, thereby forcing many investors to reach for yield in riskier asset classes. Raising prices of risky assets in this indirect fashion reduces insolvency fears, reverses wealth losses and hence adverse wealth effects on spending, and sends favorable financial signals to producers - all of which are expected to contribute to reversing downward economic momentum.

Zero (or near zero) policy rates plus outright purchases have drawn government bond yields down to historically low levels. Low yields on bonds introduce a high risk of capital loss to investors if yields return to historical norms (for bond geeks, think McCauley duration), and if investors cannot be sure they will hold the bond to maturity. The private sector will wish to raise their holdings in government bonds only if they perceive risk adjusted returns elsewhere are less attractive - yet this is antithetical to the very purpose of quantitative easing, which is to break the high liquidity preference of private investors by "trashing cash" and lowering the yield on default free government bonds.

If government yields back up - either because private sector portfolio preferences are taking their cue from QE and shifting toward riskier assets or because fiscal stimulus is helping economic activity which has the same effect - then mortgage rates are likely to back up as well, confounding any stabilization in housing sales. Alternatively, if central banks step in to buy Treasuries and thereby contain the back up in Treasury yields, more professional investors are likely to conclude "monetization" is underway and they will try to increase their exposure to inflation hedges. The net result would be a likely rise in the relative prices of energy, precious and industrial metals, "commodity" currencies, and ag products and ag land - all of which, as inputs to final products, would tend to represent an adverse supply shock to the economy. In addition, raising the price of essentials like food and energy is more likely to crowd out consumer spending in discretionary items. Neither of these supply and demand effects are particularly supportive of an economic recovery.

So, the policy response is unprecedented governmental actions based on simultaneous, mutually contradictory policies?  What could possibly go wrong here?  

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Three Indiana pension funds had said they were being shortchanged by the bankruptcy plan.

In an order handed down late today, the court rejected a request for a stay of the sale submitted by three parties, including a group of Indiana pension funds. They had argued that the sale violated normal bankruptcy procedure and that Chrysler had received federal funding for which it was not eligible.

On Monday, Justice Ruth Bader Ginsburg had granted a temporary stay, giving the court more time to consider the matter.

But in today's decision, the court did not dwell on the legal questions in the case. Instead, it said that the parties challenging the sale had not sufficiently demonstrated the need for further delay of the sale. The ruling said, in part, that "denial of a stay is not a decision on the merits of the underlying legal issues."

Is it incompetence, malice, or cherry-picking data to fit a message hoping the proles won't notice?

The brainless should not be in banking. — Willem Buiter