November 30th, 2010
03:04 PM GMT
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The EU bailout for Irish banks failed to quell financial markets. Borrowing costs for Portugal, Spain and others continue to rise, because structural problems created by the euro and single European market remain unaddressed and more crises are inevitable.

In the United States, banks engage in dollar-denominated deposit gathering and lending. The smooth functioning of the banking and payments systems are guaranteed by the Federal Deposit Insurance Corporation, the Treasury and Federal Reserve.

When banks fail, the FDIC makes good on deposits up to $250,000 by subsidizing mergers with healthy banks.

If banks are too big to be merged-for example, the recent Citigroup and Bank of America rescues-the Treasury and Federal Reserve can step in. Such extraordinary measures are possible, because the Treasury can issue dollar denominated bonds and the Federal Reserve can print dollars. The latter was critical during the recent crisis.

In the EU, individual member states regulate and guarantee the banks that take deposits and lend in euro. The Irish government guarantees covers all liabilities – not just deposits up to $250,000.

Major banks in smaller member states have grown too large for their Treasuries to act. They simply can't issue enough euro denominated bonds without driving up their borrowing costs to prohibitive levels and thrusting regular government operations into insolvency.

In Ireland, the government is potentially on the hook for liabilities equal to two times GDP-no government, big or small, can borrow that much money.

The analog in the United States would have been for North Carolina to have been responsible for all the liabilities of Bank of America.

Prior to its banking crisis, Ireland had sound finances and a balanced budget. Now it has a deficit exceeding 30 percent of GDP, and even with the EU aid package, it faces draconian budget cuts. Along with lost banking business, those will reduce GDP by more than 10 percent and impose grave hardships on citizens who neither profited from the bank industry nor were responsible for its reckless behavior.

Without European wide bank regulation and deposit insurance, reasonable ceilings on government guarantees, real EU taxing authority, and a mandate for the EU Treasury and European Central Bank to use bonding and currency printing authority to ensure the stability of banks, Ireland's banking crisis won't be the last of its kind.

Similarly, the budget problems in Portugal, Italy, Greece, and Spain stem from social spending, health care and pensions more generous than their economies can finance with any conceivable national tax regime-if national taxes are raised too high, businesses will flee, and GDP and tax revenues actually fall.

Whether social benefits are too high throughout Europe is an important issue, but the creation of the single European market has heightened expectations that benefits in southern Europe more nearly approximate the norm established in Germany, Holland and other rich countries.

However, the creation of the single European market for goods and services was not accompanied by pan European taxation to finance social spending, health care and pensions. Even though Germany and others are richer by virtue of their participation in the single EU market, they don't assist poorer countries in the manner that New York subsidies social security and Medicaid in Mississippi as part and parcel to the benefits its banking, advertizing and other service industries receive from participation in a single market across the fifty states.

The austerity now planned for poorer counties will not solve their basic fiscal problems-those will shrink their economies and tax bases. The $750 billion EU bailout fund is nothing more than a quick fix that boots the problem to the next generation of national leaders.

In the days before the euro, national government debt was denominated in national currencies, and governments could inflate and devalue their way out of a fiscal mess. That's just a stealth way of imposing losses on bond holders but in a more gradual, economically less costly, and politically palatable manner.

Now the EU has announced plans for private investors to take losses on bonds issued after 2013 if the weaker governments need another round of bailouts. The fact is sovereign governments in Athens, Lisbon and elsewhere already can enforce such losses on bondholders, and if they choose, boot the euro, reinstate national currencies and start over.

A common currency and single market in Europe simply won't work without continental institutions to guarantee the solvency of banks and share social spending, health care and pensions. Until then, the bonds of individual member states carry high risk of eventual default, and investors would do well to demand much higher interest rates than have been offered in the recent past.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

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November 30th, 2010
01:30 PM GMT
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November 30th, 2010
01:29 PM GMT
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November 30th, 2010
09:27 AM GMT
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(CNN) – In the wake of the bailout of Ireland’s banks – and the bailout of Greece still fresh in mind – investors are wondering who will be next.

Several countries in Europe have pushed through tough austerity measures, and the European Commission says those measures will take a toll on economic growth. It's predicting growth in the 16-nation eurozone at 1.5 percent next year, slightly lower than an earlier forecast.

All the uncertainty has weighed on European stocks and the euro, which has dropped 6.1 percent against the dollar the past month.

On Tuesday Asian markets closed largely lower, as concerns continue that the European debt problems will spread to other European markets, especially from Portugal. The Central Bank of Portugal comments that consolidation of public finances is needed is putting pressure on the markets.

Portugal doesn’t have the bank woes on scale of Ireland, nor the public debt problems on par with Greece, said Vanessa Rossi, senior economist at Chatham House, on World Business Today. “Nevertheless, it’s still between a rock and a hard place,” she said.

Will Portugal, or perhaps Spain (whose government debt yields continue to climb, raising its borrowing cost), be next in line for a Eurozone bailout?

 

 

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November 29th, 2010
03:59 PM GMT
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Estee Lauder CEO Fabrizio Freda talks to CNN's Felicia Taylor about the challenges of operating such a storied company.

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November 25th, 2010
12:04 PM GMT
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In the third installment of 'The Boss' series, one of our CEOs ventures out to the Jersey Shores:

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November 25th, 2010
12:03 PM GMT
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In the third installment of 'The Boss' series, one of our CEOs ventures out to the Jersey Shores:

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November 25th, 2010
10:29 AM GMT
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We have just filmed this week’s Marketplace Africa program in Braamfontein, a peripheral urban area on the outskirts of central Johannesburg.

It is quite staggering how much of Johannesburg’s inner city has changed in recent years. Juta Street, where we shot, has in the past few months blossomed into a groovy design hotspot with good coffee, an art gallery, and trendy furniture and fashion stores.

The apartments bordering this area have some of the best views of Johannesburg’s skyline and have been turned into expensive loft-style living quarters.

Across the city, a development called Arts on Main is another example of how a rundown, dodgy section of Johannesburg has been developed into a safe, fun place where South Africans of all sorts go to hangout, watch movies and shop.

Someone reading this might think, “So what? Urban regeneration is nothing new.” However, Johannesburg’s shift from a crime-ridden, dirty, overcrowded no-go zone to a place with potential is quite radical to those of us who live here.

That said, there is still a bit of a “Wild-West” feel to Johannesburg.

Some areas are still chaotic and dirty; apartment blocks are unsanitary and overcrowded like any urban slum, where drug lords seem to own the street.

However, at least once a week we film on Joburg’s streets, loiter with expensive film equipment on sidewalks, and chat to locals, and it has become increasingly obvious that slowly, many areas of Johannesburg have been reclaimed from the criminals and blossomed into a place to do business.

The success of this project was pioneered by the local authorities, which positioned a guard or policeman on nearly every corner and installed a high-tech CCTV network covering the city.

However, the business community - the big banks and mining houses - have also played a major part in bank-rolling the regeneration. This shift was also due to the long-sighted, often inspired influence of the country’s artistic community, who were looking for edgy urban lifestyle not found in the suburbs.

So my question is, do you think changing the face of a city is worth it? Tell us which other African cities are developing in ways that make you think, “Wow, this place has changed.”



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