EUOBSERVER / BRUSSELS - Finance ministers meeting in Luxembourg on Tuesday (9 June) made progress on a new financial supervisory framework for the European Union but failed to reach an agreement on several of its most contentious issues.

Division over who should chair a new body designed to monitor overall risk levels in the European financial system mean EU leaders will be left to make the tough decisions when they meet in Brussels on 18-19 June.

What role for Trichet and the European Central Bank in a new European Systemic Risk Council?

At stake is the chairmanship of the proposed European Systemic Risk Council, with the European Commission last month suggesting the position should be filled by the president of the European Central Bank.

The UK and a number of other member states outside the Eurozone however, fear their interests will not be represented sufficiently if this is the case, with wrangling now likely to continue all the way up to the next European summit in just over one week.

The implications of the downturn will be the focus of this week's World Economic Forum on Africa in Cape Town. A host of business and political leaders are to try to assess Africa's challenges and opportunities.  

Just a year ago at the same gathering African leaders were upbeat about their economies with the continent enjoying a prolonged period of strong growth of up to five percent over the past five years.

All that appears to have been snuffed out almost overnight and has left the continent reeling in the wake of the global economic crisis. 

Dr. Dirk Kohnert, a researcher with the German Institute for Global and Area Studies (GIGA) in Hamburg, told Deutsche Welle that it's a recurring theme: "It's always the same. The poor are affected foremost. And most of the poor countries worldwide are in sub-Saharan Africa. In addition to the 400 million poor there, there will be 27 million new poor at the end of this year."

A new government report shows that the former East Germany has been less bruised by the economic crisis than the richer West. The region has more smaller companies that are more flexible and less dependent on exports, it argues.

The former East Germany has long been eclipsed economically by the richer and more industrialized West. Yet ironically the eastern part of the country is now actually better equipped to deal with the ongoing economic crisis.

A worker at the Signet Solar factory in Mochau, near Dresden: Germany's eastern states have been less hard hit than the west by the crisis. That, at least, is the conclusion of the government's annual report on German unity to be released on Wednesday. According to the Berliner Zeitung newspaper, which has seen the report, it states that the East's "stronger resistance to the crisis" is due to the higher number of small- and medium-sized companies there. These are thought to be able to react more flexibly to the challenges posed by the economic downturn.

Furthermore, in comparison to western Germany, companies in the former East are far less dependent on exports. Germany, a highly industrialized country, is the world's biggest exporter and has been severely hit by the slump in global trade. On Tuesday the latest figures showed that German exports had fallen by an alarming 22.9 percent in April compared with the same month in 2008.

US long-term interest rates rose to the highest level of the year yesterday, threatening the "green shoots" of recovery, after the latest sale of 10-year government debt met with a tepid response from inflation-wary investors.

Concerns about the growth of government borrowing forced the US Treasury to give investors in an auction of $19bn in 10-year notes a yield of 3.99 per cent - 4 basis points higher than the yield available before the auction. That constituted the biggest yield markup since a 10-year auction in May 2003, said Morgan Stanley. Yields on the 10-year note, the benchmark rate for US mortgages, hit a high of 4 per cent during the day, up from 3.6 per cent a week ago.

The below piece is a good analysis of a hypothetical Treasury/Dollar black swan event, courtesy of Eugenio Aleman from, surprisngly, Wells Fargo. Eugenio does the classic Taleb thought experiment: what happens if the unthinkable become not just thinkable, but reality. Agree or disagree, now that we have gotten to a point where 6 sigma events are a daily ocurrence, it might be prudent to consider all the alternatives.

   Thinking the Unthinkable

    Several years ago, economists were saying that a new Great Depression was unthinkable, or even impossible, because we had learned from the 1930s. Today, we are teetering on the edge of a worldwide recession that could very well become a depression, at least according to those self-proclaimed "Doctors of Doom." On this note, I would like to discuss another "taboo" subject related to the U.S. dollar and closely linked to monetary and fiscal policy. And while this topic is a highly unlikely event, one of those events that Nassim Taleb would call a black swan, it suffices to remember how unlikely a collapse in home prices was several years ago. Remember?

    In previous reports, I have touched upon the concerns I have regarding the overstretching of the federal government as well as of monetary policy while the Federal Reserve tries to maintain its independence and its ability, or willingness, to dry the U.S. economy of the current excess liquidity. Furthermore, we heard this week the Fed Chairman's congressional testimony on the perils of excessive fiscal deficits and the effects these deficits are having on interest rates at a time when the Federal Reserve is intervening in the economy to try to keep interest rates low.

    Now, what I call "thinking the unthinkable" is what if, because of all these issues, individuals across the world start dumping U.S. dollar notes, i.e., U.S. dollar bills? We have heard that "rogue" states, like Iran, Venezuela, Nicaragua, Bolivia, as well as not-so-rogue states like China, Brazil, Argentina, Russia, etc., have been discussing a way to go from a dollar pattern for multilateral trade to another country's or a combination of countries' currencies in order to achieve independence from U.S. monetary policy decisions. While these attempts, or at least the noise they produce in the media, have increased during the last year or so, my biggest concern is not with what these countries may do, but what individuals across the world may do if they believe the U.S. dollar is in trouble. Why? Because one of the advantages the U.S. Federal Reserve has over almost all of the rest of the world's central banks is that there seems to be an almost infinite demand for U.S. dollars in the world, which has made the Federal Reserve's job a lot easier than that of other central banks, even those from developed countries. Furthermore, approximately three-fourths of U.S. dollar bills are in foreign hands or foreign safe deposit boxes or mattresses, and an about-face by individuals across the world regarding these holdings of U.S. currency could be a huge blow to the value of the U.S. dollar, U.S. debt and the Federal Reserve's monetary policy. Why? Because all those holdings of U.S. dollar bills are basically a free loan from foreigners to the U.S. government, and if there is a massive run against the U.S. dollar across the world then the Federal Reserve will have to sell U.S. Treasuries to exchange for those U.S. dollars being returned to the country, which means that the U.S. Federal debt and interest payments on that debt will increase further. This means that we will go from paying nothing on our "currency" loans to having to pay interest on those U.S. Treasuries that will be used to sterilize the massive influx of U.S. dollar bills into the U.S. economy, putting further pressure on interest rates.