Italy’s problems are not deficit-, but debt-, driven. For since 1992 it has, on average, had a 4% annual “primary deficit” (i.e. revenues exceeded operating expenses before debt service). But back then already it had a debt-to-GDP ratio of 102% (today it is one-fifth higher). During Berlusconi’s 10-year tenure as Prime Minister Italy’s economic growth was less than that of, among others, Eritrea, Haiti & Zimbabwe, seemingly validating the conclusion of Ken Rogoff/Carmen Reinhart’s book This Time It Is Different, that the 90% Debt-to-GDP level is the “tipping point” after which achieving economic growth becomes problematic (which has implications for the US since its all-inclusive debt-to-GDP ratio now is North of 100%). Since 1992, to pay for the growing debt service costs, Italy’s marginal tax rate has gone from 38% to 50% & pensions been based on contributions rather than final earnings (prompting a University of Verona study to conclude that those born in 1970 will pay 50% more taxes during their working-, & receive 50% less in pension benefits during their retirement-, years than those born in 1950 (this midlife age cohort was Beppo Grillo’s core support base). And Italy is important not just because it is the Eurozone’s third largest economy, but because, if it were to fall victim to the predations of the capital market vultures, they next would start snapping at the heels of France (whose President in the ten months he has been in office has managed to become the most unpopular President the country has seen in three decades). And no one, not Germany nor the ECB, nor the two combined, is big enough to rescue France with both a chronic total deficit and a debt-to-GDP ratio of > 90%), although Chancellor Merkel do her utmost to paper this, or any other, potential crisis over until after next September’s elections.
Behemoth bureaucratic structures in both the public & private sectors develop ‘worker bee & drone’ syndromes. Their people at the “sharp end” are directly supported by others in the “back office”. But behind them there are layers of people whose utility to those at the sharp end diminishes with each layer & whose efforts become increasingly focused on keeping each other busy rather than on providing meaningful support to those at the sharp end. In the 80’s the US corporate sector ‘streamlined’ its operations by eliminating one, or more, such ‘drone’ layers. But the public sector hasn’t; in fact, it has added more layers. And when there is talk of budget constraints cum staff cutbacks the bureaucrats’ Pavlovian, self-preserving response is to threaten to let go high profile worker bees who actually ‘add value’ to the public, rather than drones who don’t. It was sad to see President Obama resort to this tactic in his warnings about sequestration, either intentionally so, out of ignorance and/or by being lead down the garden path by bureaucrats.
Michael Bloomberg became a multi-billionaire by founding the financial information services machine carrying his name. Prior to running successfully for Mayor of New York City in 2002 he switched, rather inexplicably, from being a life-long Democrat to being a registered Republican, only to switch again, in 2007, to Independent status. While throughout he was being thought of as a fiscal conservative, he nevertheless told John Gambling, the third-generation host of a popular New York City morning radio show, “Are we (i.e. the federal government) going to run out of money … No. We’re spending money we don’t have … It’s not like your household. In your household people are saying ‘Oh, you can’t spend money you don’t have’ That is true for your household because nobody is going to lend you an infinite amount of money. When it comes to the US federal government, however, people seem to be willing to lend us an infinite amount of money …”. John Mauldin’s comment, in the March 6th edition of his market letter From the Frontline, whence this quote emanated, was that “as infinity approaches, the bond market gets antsy” (And Mayor Bloomberg was wrong : a significant portion of the money the US Treasury borrows these days doesn’t come from “people”, but from the Fed’s prodigious digital printing presses; in fact, the Fed now has more UST securities on its balance sheet than the largest two ‘outside’ investors, the Japanese & Chinese central banks, hold between them.
Among other gems offered by Mauldin in this context in his letter are the following :
• “Austerity is not fun. Ask any teenager whose parents have set limits where previously there were none. Tantrums ensue”;
• “Bond markets are typically sanguine until the BANG moment” (Americans aren’t good at history. But I can well remember how, within a few years after Walter Wriston, the long-time (1967-84) CEO of Citibank & the”most influential commercial banker of his time”, had proclaimed that there was no risk in lending to Mickey Mouse governments because “Countries cannot go broke”, the 1980’s Latin American debt crisis erupted;
• “The experience of over 250 debt crises over the past few hundred years tells us that there is no specific moment when the markets lose confidence in a government’s debt. But when it happens, it is ferocious in its intensity”);
• “If Japan can borrow such sums (as Prime Minister Abe proposes) at a 240% debt-to-GDP ratio the thinking (in political circles) surely goes ‘the US can borrow a few trillion more’”; and
• “I warned two years ago the markets could lose patience in 2014 if they do not see a serious attempt to curtail the US deficit (& compared to what is needed to bring the growth of the debt in line with that of GDP, a couple trillion dollars over 10 years is a mere bagatelle, little more than a drop in a bucket). The recent gold standard for a bearish mindset …Noriel Roubini … thinks I am too pessimistic – we can probably get through to 2015″.
One of the market letters I get claims someone has calculated that every $100BN in Fed bond purchases is worth at least 42 points on the S&P 500. So, it says the US$850BN Bernanke proposes to add to the Fed’s balance sheet this year (remember, he retires in January but his mooted successor, Vice-Chairman Janet Yellen, is as much, if not more, of a dove than as he is), should be good for the S&P 500 going through 1800 by year end (from the current 1540). Be that as it may, with more & more central banks now going into the ‘liquidity-pumping’ business, the prospect of more “bubbles’ grows. For when money is cheap, bubbles follow, as naturally as night follows day (and, if so, the “too big to fail” issue will once again come to plague financial policy decision-makers – and quite deservedly so-who, however, don’t end up praying the price).
Those who complain about the unfairness of the top 10% of Americans paying, according to the National Tax Payers Union, 70% of all federal income taxes, conveniently forget that they also account of 80+% of the nation’s personal wealth & 50% of its personal incomes, and that federal personal income tax revenues account for < 50% of total federal revenues. So the tax system may be nowhere near as skewed at their expense as they would have the hoi polloi believe. Talking about a government in which the left hand doesn’t know what the right hand is doing. The Atlantic blue fin tuna, the largest of the eight-member tuna family (that has been known, many years ago, to grow to 15 ft. length & 650+ kgs. in weight) is being fished into to death, largely due to price pressures from Japan. In the past decade the average price for blue fin has risen roughly eight-fold & last January, at the year’s first auction at Tokyo’s Tsukiji fish market, a 222 kg blue fin sold for a record US$1.76MM, US$7,928/kg. The 60,000 or so mature blue fin believed to be left in the Western Atlantic are but a fraction of their number four decades ago. And while Ottawa is talking about possibly seeking to have the fish listed as a species at risk (while it is already listed as endangered by the IUCN/International Union for the Conservation of Nature), last November, at a meeting of ICCAT (the International Commission for the Conservation of Atlantic Tunas) Canada’s representatives lobbied for a hike in Canada’s 1,750 tonne quota of Atlantic blue fin tuna (i.e. 7,000-8,000 fish of the size that brought the record price in January). All this for an “industry” that employs a few hundred people on a (short) seasonal basis & is estimated to be worth $10MM annually to Canada’s economy (i.e. 0.0005% of its GDP). And worldwide, there is something amiss with the tuna fishing business; for while the global quota set by the various agencies responsible for setting quotas for different parts of the oceans, in 2010 was 13,525 tonnes, 32,565 tonnes were ‘landed’. Alberta & Texas have much in common. In both places one can encounter cowboy hats & boots, monster trucks, white-faced cattle & fields of grain, pumpjacks, and people who pride themselves on being more entrepreneurial & self-reliant than ”Easterners”. But there are two key differences, one good & one bad. The former is that there are far fewer guns in Alberta, even though in rural parts one will see the occasional pick-up truck with a gun rack behind the seat. And the latter is that Texas conservatives are conservative while Alberta’s ruling “Conservative Party” is fiscally as conservative as the late Hugo Chavez & its government a collection of dunderhead spendthrifts. Ted Stronach was born in Austria in 1932 & quit school at age 14 to become an apprentice tool & die maker. In 1954 he emigrated to Canada where in 1956 he started his own shop that ultimately morphed into Magna International, a multi-billion dollar world class maker of auto parts. Throughout his life he maintained close contact with the country of his birth & had an interest in politics (he ran in 1988 for the Liberal Party in a Toronto region constituency & his daughter was briefly both a Conservative and Liberal MP in Ottawa). A couple years ago, in his late 70's, he jumped back into the political fray, albeit in the country of his birth, not his adopted one, where in 2011 he launched a political alliance that, after getting 8% popular support in a Gallup poll in August 2012 became a political party the next month. It is anti-Euro & anti-Brussels, and pro lower taxes & less government, and in two recent local elections got 10% voter support. He could become spoiler in Austria’s presidential election this fall, just like Beppo Grillo was in the Italian elections; for his platform is not dissimilar & appeals to the same voter sub-set. Shell is Nigeria’s biggest oil producer & produces ‘Bonny Light’ oil, a low sulfur, high API product much in demand by US refineries. But the Chairman of its Nigerian subsidiary recently raised the spectre of shutting down its Nembe Creek pipeline, one of its most important assets there for moving oil to market, due to the attacks on-, & theft of oil from-, it. Recently daily losses have averaged 60,000 bbld., i.e. 40% of its capacity throughput, and last month on three successive days losses were such as to force its complete shut-down - so far this has hurt Shell’s bottom line more than the global oil supply situation because a) 150,000 bbld is small potatoes in the global scheme of things and b) any oil stolen finds its way into the global oil market in various ways. Meanwhile Shell & various government agencies are pointing fingers at each other as to whose fault it is that the pipeline isn’t better protected. And if the line were to close, the non-criminal locals might actually benefit since the thieves often spill as much as they steal. Last week Gleanings contained an item about the uranium supply/demand situation that noted that, while much of the newly-mined supply shortfall has been alleviated by the recycling of uranium from decommissioned Soviet-era nuclear missiles, this source of supply may soon dry up. And the February 23rd Economist, validated this by carrying a chart, based on information from the Bulletin of Atomic Scientists, that shows that since the fall of the Berlin Wall Russia’s inventory of nuclear warheads has declined 75% to 10,000, only half of which are scheduled for dismantling. A recent chart of US household debt showed it had declined from US$12½TR in 2008 (all numbers come off a chart & so are only approximations) to US$11BN. Mortgage debt (not incl. home equity loans) declined from US$9.2TR to US$8.0TR & the only loan category to saw serious growth was student loans At last report mortgage debt accounted for 71% of the total, auto- & student loans for 7% each, credit card debt for 6%, and home equity revolving- & other debt for 5% each. And while the resumption of growth in household debt, especially auto loans, is welcomed as being positive for consumer spending, & hence for GDP growth), with disposable income under pressure from recent tax increases & inflation, this would not be so if it is due to people starting to taking on new debt to maintain their standard of living. In France in 2012, according to Gira Conseil, a food consultancy, for the first time ever fast food captured a greater share of the country’s eating-out spending than ‘traditional restaurants’. What was really staggering was the extent of the shift : while fast food had a 40% market share in 2011, in 2012 it was 54%. This was due less to much more spending at “cheap” fast food places than to much less spending at higher cost sit-down restaurants as the country went into recession. One unique aspect of the forthcoming bailout of Cyprus is that its banks have been the conduit of choice for, & have greatly benefitted from, “dirty money” flows from Russia, the Middle East, Asia and, to a lesser extent, Europe itself. GLEANINGS II - 501 Thursday March 7th, 2013 A ‘MAJOR GOLD RALLY’ IS COMING IN Q3 (Business Insider, Matthew Boesler) • According to UBS commodity trader Julien Garran the gold market will approach “High Noon” (i.e. a moment of truth) in the Second Half. For he noted in a new report on commodities that at mid-year “the outlook ... depends critically on whether the Fed ‘blinks first’ and stops QE, or whether the global economy ’blinks’ and we see a slowdown in global growth momentum into 3Q13 while QE3 is continuing.” He expects the latter (which would be bullish for gold), in part due to Beijing’s efforts to tighten fiscal policy to contain rising house prices and inflation (& restrain the growth of the ‘debt mountain’?). He has been unduly bullish before. But often in the past those who preached & practiced contrarian investing have often outperformed the lemmings in the business. And in this case a serious correction may be helpful in “getting the kids of the street” (i.e. winnow out the speculators who bought “paper gold” on margin), thus allowing real demand for real gold from real investors in central banks, and Indian, Chinese & Middle East buyers of gold for jewelry purposes & security of capital reasons, to overwhelm newly-mined supply (especially if those who enabled “paper gold” creation by shorting the market were made reluctant to keep doing so by the Bundesbank’s decision to repatriate, albeit slowly, all of its gold in the Bank of France & half of that in the Fed. WHY US INTEREST RATES ARE SO LOW Business Insider, Joe Wiesenthal) • On March 1st Bernanke made a speech, at the Annual Monetary/Macroeconomic Conference sponsored by the San Francisco Fed. Coming late on a Friday, it was largely ignored by the media. In it he sought to explain, in a section entitled Why are Long-Term Interest Rates so Low?, why this was so in the following terms : “Long-term interest rates are the sum of expected inflation, expected short-term real interest rates, and a term premium. Expected inflation has been low and stable, reflecting the central bank mandates and credibility as well as considerable resource slack in the major industrial economies. Real interest rates are expected to remain low, reflecting the weakness of the recovery in advanced economies (and possibly some downgrading of their long-term prospects as well). This weakness, all else being equal, dictates that monetary policy must remain accommodative if it is to support the recovery and reduce disinflationary risks. Put another way, at the present time the major industrial economies apparently cannot sustain significantly higher rates of return; in that respect, central banks - so long as they meet price stability mandates - have little choice but to take actions that keep nominal long-term rates relatively low ... Finally, the term premiums are low or negative, reflecting a host of factors, including central bank actions in support of economic recovery. Thus while the current constellation of long-term interest rates across many advanced countries have few precedents, it is not puzzling. It follows naturally from the implications of these circumstances for the policies of their central banks.” He doesn’t touch upon the role “Operation Twist” may, or may not, have played. He contradicted himself when later on he said “central banks ... have little choice but to take actions that keep nominal long-term rates low.” He misrepresented the facts when he said that “expected” inflation has been low & stable; for concern about higher inflation has been growing, as he himself implied in his recent appearances before Congressional lawmakers when he said the risk of the Fed’s activities fueling inflation was worth paying to boost economic growth. His brief treatise on why real interest rates will/must stay low didn’t mention that the main beneficiary thereof is the US government, that it dispossesses savers, incl. the income-needy, coupon-clipping elderly (thus reducing aggregate demand), & creates major problems for pension funds & incremental costs for corporate sponsors that keep them from doing what they do-, & like-, best : ‘grow the business’! TIME FOR THE FED TO ‘TAKE AWAY THE PUNCHBOWL? (90.9WBURR, John Ydstie) • The stock market’s long climb from its recession bottom is raising it is a bubble that will burst. Since this bubble is seen as having been pumped up by the Fed’s easy money policy, this is beginning to lead to calls, even from within the Fed, for an end to its extraordinary efforts to keep interest rates low. Jeffrey Lacker, Head of the Richmond Fed, calls the Fed’s massive efforts to keep interest rates low “unhealthy”, his Richmond Fed counterpart, Charles Plosser, told a group of Pennsylvania businessmen that the Fed’s easy money policy could cause financial instability and inflation & Randall Kroszner, a former FED policy maker himself & now a professor at the University of Chicago’s School of Business, believes that, with the economy healing, a debate over the Fed’s policy is healthy, saying “The fundamentals are starting to come back, and I think there’s a legitimate debate on whether more needs to be done.” On the other hand, Alan Blinder, a Princeton Economics professor & a former Fed Vice-Chairman (for eighteen months ended in January 1996), pooh-poohs the idea of there being a stock bubble (although he concedes that the Fed’s low rate policy has pushed the stock market higher), basing his case on the fact that corporate profits are soaring which, he claims, fits the Fed’s strategy to “gently nudge ... people into taking a little more risk instead of putting all their money ... under the mattress.” • Meanwhile on March 4th Paul Volcker told the National Association for Business Economics in Washington “it’s never popular to take the so-called punch bowl away or weaken the liquor ... And there’s a lot of liquor out there but ... it can be done. They put it in, they can pull it out. But will it be done in a delicate kind of way? It’s going to be a big challenge.” In Fed Real Politik terms, without a vote this year on the decidedly dovish policy-setting FOMC , Lacker & Plosser this year are crying in the wilderness & will make little difference to the price of tea in China. In any case the only opinions that really matter in FOMC meetings & decisions are those of Fed Chairman Ben Bernanke, Vice-Chairman Janet Yellen & New York Fed President William Dudley (who came there only six years ago from Goldman Sachs & whose salary, like that of all New York Fed Presidents, is paid for by Wall Street), all three of them confirmed ‘doves’. And Volcker (whose reputation on monetary policy issues is solid & well-deserved, and whose perspective, as an octogenarian, is likely less polluted by pre-conceived notions, has a point when he wonders if the Fed will be able to extract itself in a “delicate” manner from the corner in which it has painted itself. For its track record of “Goldilocks” monetary policy decisions is dubious at best, & sub-optimal at worst, & the three aforementioned key policy makers so blinkered that a sub-optimal outcome is all but a foregone conclusion (the “punchbowl” reference comes from William McChesney Martin, the long-serving (1951 -1970) Fed Chairman who once described his job as “having to take the punchbowl away just as the party gets going” - something Alan Greenspan found difficult to do, and Bernanke seems intent on not doing no matter what). And whereas Bernanke spent almost all his career in academia, Janet Yellen all of hers in the public sector, & Alan Greenspan as a consultant (who supposedly once was fired from a consulting job for being “a hack that always gave ... his clients what they wanted to hear instead of something actual”. And while all three of them have Ph.Ds in Economics, Martin had an undergraduate degree in English & Latin (although, later in life took some economics courses without ever getting a degree) & before becoming Chairman, had been successful in the real world, in financial markets, as a general-level logistics expert in the US Army during WW II, & as Head of the Exim Bank in its early years. TOO MUCH OF A GOOD THING (The Economist) • Under Texas law the state cannot plan a bigger budget than the cash the State Controller expects to have coming in in the next two-ear budget period (its legislature is one of the few left that sits only every other year). So there was great joy when she announced recently there will be US$101.4BN for spending in 2014-2015; for after several difficult years, sales-tax receipts are higher than expected & fracking-driven oil & gas revenues are up. • Four years ago it was a different story. Faced with a US$20BN shortfall, the Republican state government bit the bullet. While the Democrats wanted to empty out the US$9.3BN “rainy day fund”, it did so reluctantly, & only sparingly, with most of the shortfall being eliminated by deep cuts (thus the rapidly-growing public school system got US$5BN less than promised). But now that things are better it seems disposed to spend a bit more freely, although, to the irritation of Democrats, more so on much-needed infrastructure, with water being a priority, than on operational spending, such as that for schools. The Texas tax system is the very opposite of Alberta’s. It has no state personal income tax & sales taxes generate over half the state government’s revenues, while Alberta has a modest “flat rate” provincial income tax & talk of a provincial sales tax is a ‘third rail’ issue. KERRY BLASTS TURKISH LEADER FOR REMARKS ON ISRAEL (DJ, Jay Solomon) • He met on March 1st with Prime Minister Tayyip Erdogan, as part of an effort to create an international coalition to topple Syrian President Bashar al-Assad & curb Iran’s nuclear program. This was just two days after Erdogan had equated, at a UN conference in Vienna, Zionism with fascism & called the Jewish ideology as one of “crimes against humanity”. After meeting with his Turkish counterpart, he said “We not only disagree with it (the Prime Minister’s comments), we found it objectionable ... I believe there is a way forward, but it obviously gets more complicated in the aftermath of a speech such as the one we heard in Vienna”. And while his officials warned the increasing gulf between Turkey & Israel, once strategic allies, could undercut US efforts to work with Mr. Erdogan to stabilize the Middle East, Turkey’s leaders offered no sign of wanting to end their war of words with Israel. The problem is that Israel wants to “stabilize” the Middle East solely on its terms. This not only makes negotiating with Israel about as useful as the clapping of one hand, but also is a policy stance that is now increasingly past its “Best Before” date! LAPID : TALKS TO FORM COALITION ‘FAR FROM OVER’ (Jerusalem Post) • Yair Lapid told his Yesh Atid Party on March 4th “there are still a number of issues to be settled” although Naftali Bennett, head of the Jewish Home/Bayit Yehudi Party, said on the Walla! News website that same day, after he had met with Netanyahu to discuss terms for joining a coalition, “I hope that Israel will have a government soon” (these two leaders had earlier made an agreement to keep the far right, ultra-orthodox parties out of government (with Yesh Atid’s 19 seats in the new Knesset & Bayit Yehudi’s 12, they control as many seats as Likud Beitenu, and far more than Shas’ 12 & the United Torah Party’s 7). • While Netanyahu originally accused the two leaders of an “unacceptable” boycott of an entire population group, on March 3rd, after informing the Shas Party of his intention to do so, he started working on a coalition that would exclude the two haredi parties (which would make it more acceptable internationally) . But this isn’t a done deal yet. Thus the chief negotiator for Likud/Beitenu on March 3rd attacked Bayit Yehudi for refusing to join a coalition without Yesh Atid & for its demand Netanyahu cancel his coalition agreement with Tzipi Livni (whose party will have six seats in the Knesset) that gives her not just the Justice Ministry but also primary responsibility for negotiating with the Palestinians (which Bennett, who tolerates no talk of a Palestinian state, opposes). The only sure thing, to the extent that anything can be taken for granted during Israeli coalition-building, is that the Labor Party won’t be part of it; for its leader, Shelley Yacimovich, told her party on March 4th that being “an effective and combative opposition ... will be much more effective than sitting in a coalition whose policies will be dictated by Netanyahu.” Time is running out on Netanyahu; for he faces a March 15th deadline for submitting a coalition government list to President Shimon Peres. So he seems to have ditched his earlier position that the ultra-orthodox parties had to be included since ending the exemption from military service for young ultra-orthodox men, a sine qua non issue for both Lapid & Bennett, had to be done by secularists & haredi together to prevent a rift in the nation. While Yesh Atid is centrist (& Lapid basically ran on a ‘good government & run the bastards out-of-own’ platform) & the Bayit Yehudi is of the non-ultra orthodox right, their leaders agree on ending the exemption (& on the indivisibility of Jerusalem). Generally speaking, Lapid & Bennett are both similar & different. Both are relatively young (Lapid in his late-, & Bennett in his early-, 40's). While Bennett served (just) in the last Knesset, Lapid as recently as 15 months ago was still a working media type. Both “made their bones” outside politics - a novelty in Israel- : Lapid in the media & Bennett in the software business (from which he exited a multi-millionaire). While both were born in Israel, their family backgrounds are quite different : Lapid came from a political family, his late father, a Holocaust survivor, a decade ago, & late in life, for brief period’ was Israel’s Deputy Prime Minister, Justice Minister & Leader of the Opposition, while Bennet’s parents were American Zionist immigrants & he himself is a practicing Orthodox Jew. Neither one lives in a settlement. LAPID, BENNETT, MOFAZ FORM BLOC TO PRESSURE PM (JP, Lahav Yarkov) • On March 7th the leaders of the (centrist) Yesh Atid- (headed by Yair Lapid), rightist Bayut Yehudi- (Naftali Bennett) & (tiny, with just two seats) Kadima (Shaul Mofaz) parties formed a bloc (that will control two more seats in the new Knesset than Likud Beitenu’s 31) that will join a Netanyahu-led coalition government & support it for four years, if they get the two top-tier ministries, other than Defense, namely Finance & Foreign Affairs (the former only the politically suicidal would aspire to, & the latter of which Lieberman still thinks he ‘owns). • While Yair Lapid wrote on Facebook “it is not true and honorable”, he is known to engage occasionally in double-talk, such as when he said last week that he doesn’t boycott any person, but won’t sit in a government with Shas & the United Torah Party (the two haredi ones). Lapid is said to have demanded the Foreign Affairs portfolio (where once Netanyahu supposedly wanted him for international image reasons) only to be told it was Lieberman’s & to be offered the Finance portfolio, which he turned down, and which Netanyahu is now expected to offer to Bennett (who may well be the best candidate for it & who may well be willing to take it in the expectation that, if he did a great job there, in four years, when the hardship was forgotten, it will have burnished his political star). Meanwhile, after being challenged to do so by Labor MK Merav Michaeli & the OMETZ governance watchdog group, Attorney-General Yehuda Weinstein ruled there is nothing barring Netanyahu from reserving the Foreign Affairs post for Lieberman pending the outcome of his criminal trial (for fraud & breach of trust) & dismissed claims by Michaeli that Lieberman “hovering over” the Foreign Affairs Ministry would pressure its employees to change their testimony for fear of reprisal. • But there is lots of background noise. Environmental Protection Minister Gilad Erkan accused Yesh Atid of not wanting Yair Lapid to be Finance Minister& having to make unpopular decisions. Others in Likud claim Yesh Atid is trying to distract the public from the big issues, & that, since Yair Lapid during the election campaign kept asking “where’s the money?”, as Finance Minister he could find out first hand where the money is, and make changes & introduce reforms. Lapid & Bennett (& Likud) are at loggerheads over the number of ministries in the new government. The former is dug in on only 18 (whereas the outgoing government had 30) on the grounds that ”When the next budget is passed, there are going to be major cuts and the public will have to pay. In that situation, it’s not fair for their money to go to an overinflated government”. Bennett, on the other hand, is targeting 22-23 (to ensure this party would get at least four ministries , one for each three of his MKs, & has indicated to be willing to go as high as 25, while Likud Beitenu’s concern is that a smaller Cabinet will mean some of its Minister in the last government will have to be demoted to just plain MKs, since Yesh Atid is also quite insistent there shall be no Ministers without Portfolio. In the end, Lapid will likely get his way; for Netanyahu can handle a few desertions from the Lieberman group, but needs Yesh Atid, especially if he could somehow get a ‘wink-wink’ informal agreement of non-opposition on crucial votes support from Labor’s Shelly Yacimovich. All in all, it is beginning to look that the next Israeli government could be significantly less ‘hawkish’ on the Palestinian issue than the last one. WHICH WAY FOR MR. HOLLANDE? (The Economist) • After his election last May he acted out his election program. He lowered the retirement age for some workers. He raised a family benefit. He capped petrol (gasoline) prices. He vowed to stop factory closings. He soaked the rich with a 75% income tax rate (which a court has since ruled ‘unconstitutional’), and hit companies & individuals with other higher taxes. But now he is being accused of swinging to the reformist centre. For after a damning report on French competitiveness by a leftist industrialist, Louis Gallois, who called it an “emergency situation”, his government has acknowledged that excessive labour costs have been a (major?) factor in France falling behind Germany in the past decade, and M. Hollande has started talking about the need to cut public spending (that currently accounts for 56% of GDP, vs. an average 49% for the EC as a whole). He has begun facing reality : while during the election campaign his assumption was that France’s GDP would grow by 1.7%, once in office he shaded that to 0.8% & recently conceded it would be lower still (the consensus is that there is a good chance of it actually going negative). With factories closing, industrial production stalling, investment plans being put on hold & rich people leaving, he has started to realize the limits of state power & of a tax-and-spend policy in a country that breaks records for both. But this view is not yet shared by the rest of his Socialist Party (particularly those in Parliament, most of whom got there with public sector worker support). Nevertheless, it’s far from clear that he is ready to curb public spending; for while one wished he would become a French Gerhard Schröder, willing to make the deep reforms that are needed, somebody who knows him well says “Whenever he can avoid hard choices, he will”; so he likely will do only enough to keep the markets & rating agencies at bay. While this may be enough to keep disaster at bay, it won’t reverse France’s slow decline. While France has one of the largest deficits in the EC, with the passing of each day he is likely to find more reasons to do less, rather than more, thereby increasing the likelihood that when the next election comes he will pay for it. And a sound, competitive French economy would reduce the risk to the survival of the Eurozone, & possibly even the EC itself (a risk that the outcome of the Italian elections increased). Meanwhile all may not be lost; thus in January some of France’s largest unions & employer associations agreed on a package of landmark labour market reforms that will make it easier for companies to align their wage costs with the prevailing economic conditions.