French head to polls in presidential election

First round voting begins in overseas territories as incumbent Nicholas Sarkozy appears set to face a stern test.

More than 44 million French voters are to go to the polls for the first round of a presidential election that represents a serious threat to incumbent Nicholas Sarkozy's tenure in the post. While predictions of a high abstention rate and a strong protest vote have left the outcome uncertain, opinion polls point towards Francois Hollande, Sarkozy's main Socialist challenger, replacing his conservative rival. The two 57-year-old political leaders are on course to finish in the top two in Sunday's polling, thus setting them up to square off in a second round vote on May 6. The result of that vote will decide who is France's president for the next five years. Voting began on Saturday in France's overseas territories, which are mainly islands dotted around the Indian, Pacific and Atlantic oceans. On Sunday, voting will continue in 85,000 polling stations across the country's European mainland. Voting will begin at 8am local time (06:00 GMT) and continue until 8pm (18:00 GMT). Voting estimates will then be immediately published, giving what has been a traditionally accurate assessment of how the polls will stand once results are finalised. In all, 10 candidates are in the race, with Hollande and Sarkozy trailed by far-right leader Marine Le Pen, hard-left leader Jean-Luc Melenchon and veteran centrist Francois Bayrou. A handful of outsiders round out the field. Once the first round is over, the top two candidates will face each other in the final poll, with the run-up to that including a televised debate. Spotlight coverage of April 22 presidential election Hollande says that Sarkozy has trapped France in a spiral of austerity and job losses, and has called for the European response to the debt crisis to be more pro-growth. Sarkozy, meanwhile, says that his rival is weak-willed and would spark panic in financial markets by adopting an approach that involves increased government spending. Al Jazeera's Tim Friend, reporting from Paris, said that Sarkozy faces a stiff challenge due to his "extraordinary" unpopularity. "A lot of the people voting will be putting their ballot paper into the ballot box more against Sarkozy than perhaps for the candidate they eventually vote for," he said. Since Saturday, there has been no sign of any of the rhetoric that has characterised an increasingly heated contest, as French law prohibits campaigning and opinion polls on the eve of voting. Voters went about their business without being accosted by pamphleteers, the campaigns' websites, Facebook pages and Twitter feeds were left without updates and broadcasters had to find other subjects to interview. Source: Al Jazeera and agencies Newscribe : get free news in real time

Global recession grows closer as G20 summit fails in disarray, Europe stumbles on through debt fog!

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G20 ends in disarray as Europe stumbles on through debt fog

Greg Keller

The G20 summit ended in disarray without additional outside money to ease Europe's debt crisis and new jitters about Italy clouding a plan to prevent Greece from defaulting.

In Athens, Greece's prime minister survived a confidence vote in parliament early on Saturday morning, calming a revolt in his Socialist party with a pledge to seek an interim government that would secure a vital new European debt deal.

In the end, only vague offers to increase the firepower of the International Monetary Fund - at some later date - were all the eurozone leaders were able to take home Friday after two days of tumultuous talks.

Greece's PM George Papandreou (R) and Finance minister Evangelos Venizelos smile after winning a vote of confidence. Photo: Reuters

With their own finances already stretched from bailing out Greece, Ireland and Portugal - and the United States and other allies wrestling with their own problems - eurozone countries had been looking to the IMF to help line up more financing to prevent the debt crisis from spreading to larger economies like Italy and Spain.

Italy's fate in particular is crucial to the eurozone, because its economy - the third-largest in the currency union - would be too expensive to bail out. The implications for the world economy are stark: The debt crisis that has rocked the 17-nation eurozone threatens to push the world economy into a second recession.

European leaders could point to one potential catastrophe averted: They stared down Greece's prime minister and berated him into scrapping a referendum that threatened their European bailout plan. Greece's politics are in upheaval as a result, but the shaky bailout plan appears back on track - for now.

"We want Europe to work," French President Nicolas Sarkozy said on French TV when the summit was over. "I think today we can have confidence ... but that's not to say our troubles are behind us."

In the end, the Greek question completely derailed Sarkozy's aim of using the summit to show that Europe had sorted out its debt problem once and for all - and possibly convince some of them to pitch in to the rescue effort.

In the space of days, the already shrunken list of goals set out by France to close out its year as head of the G20 was scrapped, replaced by a nearly constant stream of shocking new developments and reversals in Europe's long-running attempt to get control of Greece's debt crisis.

That reality was perhaps best illustrated at the height of the summit on Thursday evening, when hundreds of journalists dropped what they were doing in the basement of Cannes' Palais des Festivals and gathered around television screens to watch a live transmission from the Greek parliament in Athens, where Prime Minister George Papandreou was speaking.

The week of unending drama in Athens horrified its European partners, spooked global markets and overshadowed the summit in Cannes. The threat of a Greek default or exit from the common euro currency has worsened the continent's debt crisis.

When the week started, Europe had finally reached an intricate, ambitious and fragile deal to try to rescue Greece and stop the crisis from spreading any further. The G-20 summit was supposed to solidify and clarify the deal and get the world economy back on the right track.

Then on Monday night, Papandreou shocked his European partners and domestic allies by announcing he would put the plan to a referendum. Markets panicked, as did many of the leaders coming to Cannes.

Sarkozy and German Chancellor Angela Merkel held a series of frenzied meetings, then summoned Papandreou on Wednesday. If you lose this referendum, you could lose the euro, they told him. And they froze a new (euro) 8 billion ($A10.66 billion) loan that Greece will soon need to pay government salaries.

On Thursday, Papandreou backed down and abandoned the referendum. The U-turn left his 2-year-old government teetering.

Now Europe's leaders may find it is impossible to take back the shocking admission by Sarkozy and Merkel that an exit by Greece from the eurozone was no longer unthinkable.

And even as US President Barack Obama, Chinese President Hu Jintao and other leaders struggled to make sense of the Greek drama's fast-shifting plot, another flashpoint emerged in Italy.

Market confidence in Italy's ability to reduce its public debt and spur growth in its anemic economy has withered over recent weeks as the government weakened. MPs have defected to the opposition and some of Prime Minister Silvio Berlusconi's ministers have openly suggested the government's days may be numbered.

Market fears mounted on Friday in the wake of the confusion about Greece. Italy's benchmark 10-year bond yield jumped 0.32 of a percentage point to 6.43 per cent, indicating a surge in investor worries about the country's ability to repay its debts.

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Global recession grows closer as G20 summit fails

Cameron tells eurozone member states to solve their own problems. Link to this videoA world recession has drawn closer after a fractious G20 summit failed to agree fresh financial help for distressed countries and debt-ridden Italy was forced to agree to the International Monetary Fund monitoring its austerity programme.

Financial markets fell sharply after the two days of talks in Cannes broke up in disarray, amid concerns that Italy will now replace Greece at the centre of Europe's deepening debt crisis.

UK hopes that the Germans would relent and allow the European Central Bank to become the lender of last resort for the euro were also dashed.

On a day of unremitting gloom and yet more market turbulence, the Greek prime minister, George Papandreou, won a late-night confidence vote in his parliament after making a speech in which he promised to start powersharing talks to form a caretaker coalition government. Although he won the vote by 153-145, he is now expected to step down and a national unity government is expected to take over in the coming days.

Papandreou said he would visit the country's president on Saturday to launch power-sharing talks "with the [opposition] parties … for the formation of a government of broad co-operation."

In a sign that the spread of the debt crisis to Italy could break up the single currency, the chancellor, George Osborne, admitted the Treasury was undertaking crisis planning for a eurozone collapse.

The G20 deadlock led David Cameron to issue one of his starkest warnings about the impact on the UK economy, saying: "Every day the eurozone crisis continues and every day it is not resolved is a day that it has a chilling effect on the rest of the world economy, including the British economy.

"I am not going to pretend all the problems in the eurozone have been fixed. They have not. The task for the eurozone is the same as going into this summit. The world can't wait for the eurozone to go through endless questions and changes about this.

"We, like the rest of the world, need the eurozone to sort out its problems. We need more to happen in terms of detail on the European firewall."

Cameron hinted at worse to come, describing this as only "a stage of the global crisis".

There had been hopes that the G20 would agree to increase IMF resources by as much as $250bn to more than $1tn, but disagreements about the wisdom of it, structure, size and contributors to the fund left world leaders forced to pass the issue on to a meeting of G20 finance ministers next February.

The French president, Nicolas Sarkozy, had been eager to flourish a figure both to reassure the markets and to top his chairmanship of the G20.

Cameron revealed the friction, saying: "The very worst thing would be to try to cook up a number without being very specific about who is contributing what. If you cannot do that, it is better to say the world stands ready to increase resources to the IMF as necessary."

In the financial markets an early rise in share prices was reversed after it became clear that divisions in the G20 would prevent a deal in Cannes to boost the firepower of the European financial stability facility (EFSF) or the IMF. The yield on 10-year Italian bonds rose from 6.2% to 6.4%, the highest since the euro was founded, raising fears that the country would face problems financing its huge debts.

Obama, under pressure from Congress, was deeply reluctant to contribute to an expansion of IMF funds without clearer signs that the eurozone was sorting out its problems. Admitting that he had been given a crash course in European politics, Obama urged Greek and Italian parliaments to take decisive action to control their deficits and combat what he described as some of the psychological origins of the crisis.

He also urged the euro area to start putting some resources into the EFSF, which Europe hopes to turn into a bailout fund with at least €1tn to deploy.

But the German chancellor, Angela Merkel, said: "There are hardly any countries here which said they were ready to go along with the EFSF."

Berlusconi was summoned to a late-night hotel meeting with Merkel, Sarkozy, the IMF director general, Christine Lagarde, and Obama, where he was told that the IMF was to start monitoring to ensure tough austerity measures are implemented. The measures include changes to the labour market, pension reform and the sell-off of state-owned assets.

Italy has debts of €1.9tn, or 120% of GDP, and if it followed Greece down the path towards a financial bailout, or default, the impact on the European banking system would be vast. Italy faces new tests in further auctions of its debt this month – it has to raise €30.5bn in November and a further €22.5bn in December.

Sarkozy denied that the demands on Berlusconi represented an IMF coup, saying: "We never wanted to change governments, either in Greece or in Italy. That is not our role, that is not our idea of democracy, but it's clear that there are rules in Europe and if you exonerate yourself from these rules you exclude yourself from Europe."

Berlusconi, facing defections from his own party, insisted he had invited the IMF to offer advice. Berlusconi said on Friday he had rejected an offer of funds from the IMF – "I don't think Italy needs that" – and said his country was more solid than France or the UK.

British officials privately admit that potential economic collapse in Italy is now the single biggest concern gripping world leaders. One said: "We cannot have the Italians meeting in crisis every three days. We need some action."

The UK government will now focus on urging its European partners to make progress, and will continue to support extra cash for the IMF. Cameron said he would not need UK parliamentary approval for this as the Commons has already agreed to an increase that would cover the proposed UK additional contribution.

The EFSF has €440bn ($608bn) available to lend, of which roughly half is expected to be consumed by bailouts of Ireland, Portugal and Greece. Italy has nearly €2tn in debt outstanding.

The European Central Bank has purchased Italian debt since August, but will not carry on doing so indefinitely. The need to bolster the EFSF has led the EU to pursue countries outside the euro zone with surplus cash, such as China. 

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Related posts:

• Can EU solve its own debt crisis? 

• Eurozone seeks bailout funds from China 

Can EU solve its own debt crisis?

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EU can solve its own crisis, no need for China to step in

By TEE LIN SAY linsay@thestar.com.my

SERI KEMBANGAN: China does not need to help in the eurozone debt crisis because Europe has enough money to solve the problem on its own, said Standard Chartered head of research (east global research) Nicholas Kwan.



“It is now politics that is getting in the way,” he said at a discussion on “Building Financial Hubs Rethinking the World of Money” at the 3rd World Chinese Economic Forum.

Kwan said people must not be misled to think that with China stepping in, the eurozone problem could be solved. Europe's economy is US$14 trillion (RM42 trillion), while China's US$3.26 trillion (RM9.78 trillion) in foreign reserves is only a quarter of that figure.

“To ask China to help would be to give China some limelight. Even if China were to help, they cannot expect China to help in a big way. If Germany is not interested to help, then why should China?”

Kwan said China had spent too much money investing, particularly in US treasuries, which were yielding a very low interest rate.

“I don't think China can cut down anytime soon in US treasuries, but they can do some passive diversification. Moving forward, they can reduce the proportion of new investments in the treasuries,” he said.

Kwan said that one good thing about the financial crisis was that every economy had a share in it. In the case of China, it had invested too much US dollars to a single huge borrower. “As everyone is affected, everybody has an interest for the world to recover,” he said.

IHS senior director and Asia-Pacific chief economist Rajiv Biswas said that growth for Europe in the medium term would be constrained at less than 2% but, at the same time, would not be negative.

Rajix expected moderately positive growth in the United States, with gross domestic product (GDP) expanding at an average of 2% over the next decade.

He said that much of China was moving in the middle-income group. “A large share of GDP to consumption will increase as a result of this. Moving forward, domestic consumption in China will become a lot more important,” he said.

Kwan added that previously, if growth in the United States and Europe were to stop, other economies would follow suit. However, this has now changed, especially in Asia and China, as the emerging economies are now able to create markets among themselves.



“While Asia would still be affected by the slowdown in the West, now they can offset some of the growth that is missing,” he said.

Tembusu Partners Pte Ltd chairman Andy Lim said the four sectors he liked in China were healthcare, resources, clean technology and education.

“When we invest in China, we never ask them to show us their books. We know it is of no use. What we first do is to spend time getting to know these entrepreneurs in the first 12 months. Secondly, we talk to their peers.

“Then thirdly and very importantly, we need to know what the entrepreneur's relationship with the local authorities are. This makes a huge difference to the bottomline. Finally, we look at their books,” said Lim.

Maybank Investment Bank Bhd director and head of dealing, equities, Lok Eng Hong said Malaysia recently made it as China's top 10 investment destinations. The top few destinations were Hong Kong, the United States, South Korea and Australia.

Chinese President Hu delivers speech at G20 Summit

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In French resort city of Cannes, Chinese President Hu Jintao has delivered a speech at the G20 Summit. He pointed out that some major economies are experiencing an economic slowdown, and some countries are facing acute sovereign debt problems. Hu called for greater attention and more concerted efforts to solve these problems.

In his speech, Hu Jintao pointed out that the world economy is facing instability and uncertainty and encountering growing risks and challenges. As the premier forum for international economic cooperation, the G20 must work to address the key problems, boost market confidence, defuse risks and meet challenges, and promote global economic growth and financial stability.

Hu also made five specific proposals. First, ensuring growth while paying attention to balance. He called on different countries to introduce new and strong measures to ensure that the fiscal and monetary policies are fully implemented and that funding is channeled into the real economy to boost production and employment.

Second, he urged pursuit of a win-win outcome through cooperation. Hu said world leaders should strengthen unity and send a strong signal of cooperation to the world so as to boost the confidence of the international community in global economic recovery and development.

Third, improve governance in the course of reform. Hu proposed that the world should advance the reform of the international monetary system in a steady manner and oppose trade and investment protectionism in order to build a fair, equitable and non-discriminatory international trading system.

Hu’s fourth proposal was to strive for progress through innovation. He urged innovative thinking, a system and mode for advancing economic and social development and to bring into full play the basic role of the market in resources allocation while avoiding blind pursuit of profit and malicious competition.

Finally, he called on promoting common prosperity through development. He said that as a developing country, China stands ready to promote mutual assistance with other developing countries and will work with them to advance durable peace and common prosperity.

To further help the least developed countries in their development endeavor, China will, in the context of South-South cooperation, give zero-tariff treatment to 97 percent of tariffed items exported to China from the least developed countries that have diplomatic ties with China.

This year marks the tenth anniversary of China’s accession to the WTO. In the past decade, China’s economy has made significant advances and its contributions to world economic growth. On the other hand, China is confronted with quite a few challenges in its efforts to maintain steady and fast growth. Hu said he was convinced that, through hard work and with the understanding and support of the international community, China’s economy has bright prospects. And continued steady and fast economic growth in China will serve the interest of global economic growth.

Hu calls for joint efforts to promote growth, financial stability
Chinese President Hu Jintao on Thursday urged the world's major economies to work together to promote growth and financial stability. "It is imperative that we stand on a higher plane, transcend differences on specific issues, move beyond short-term considerations, and jointly seek ways to overcome the crisis and sustain development," Hu told the Group of 20 (G20) summit here. <Full Story>

China makes more contributions to world economic growth: Hu
Chinese President Hu Jintao said Thursday that his country is making more contributions to world economic growth as its economy has made strides in the past decade. <Full story>

China pledges more help to other developing countries
Chinese President Hu Jintao said Thursday that his country will provide more help to other developing countries. <Full story>

Chinese President Hu's speech at G20 Summit in Cannes

China's Hu Says Europe Can Solve Crisis On Its Own


(RTTNews) - Chinese President Hu Jintao said on Thursday that Europe has the absolute "wisdom and ability" to solve its debt problems. 

After meeting French President Nicolas Sarkozy at Cannes ahead of the G20 meeting, he said that recent reform package agreed upon by EU leaders during last week's summit demonstrated Europe's determination and will to end the crisis.

According to a statement from the Ministry of Foreign Affairs, Hu said that he expects the implementation of the reforms to solve all the difficulties currently facing the region, and help in its economic recovery.

by RTT Staff Writer

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• Q&A: Why China won't ride to Europe's rescue (cnn.com)
• China to Possibly Aid Europe and Invest in Financial Bailout (prweb.com)
• We can't cure Europe's malaise, says China (independent.co.uk) 

Eurozone seeks bailout funds from China

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Klaus Regling: ''These are regular consultations at an early stage and there will be no conclusions''

Martin Patience BBC News, Beijing

The head of the eurozone's bailout fund is beginning attempts to persuade China to invest in a scheme to help rescue member countries facing debt crises.

After meeting Chinese leaders, Klaus Regling said there were no formal negotiations and would be no deal now.

It is thought China may pay about 70bn euros ($100bn) into the fund, which is expected to be boosted to 1tn euros.

Meanwhile French President Nicolas Sarkozy said debt-ridden Greece's entry to the eurozone was a mistake.

Greece was "not ready" when it joined in 2001, he said, adding that it could be rescued thanks to a new deal on the debt crisis.

European leaders worked into the early hours of Thursday in Brussels to secure an agreement aimed at preventing the crisis from spreading to larger eurozone economies.

The deal triggered a worldwide shares rally.

'Regular buyer' Beijing has made it clear that it will demand strong guarantees on the safety of any contribution it might make.

With more than $3tn in foreign reserves there are European hopes that China could ride to the rescue.

As the EU's biggest trade partner Beijing would also be hard hit by any downturn in Europe.



But like other investors, China will want guarantees.

And Beijing may push for other concessions, such as market economy status - a move that would make it harder for European companies to press trade complaints against Chinese rivals.

Any investment will also be fraught with political risk.

China's fund managers have faced criticism after earlier overseas investments soured.

Despite being the world's second economy, more than 200m Chinese live in poverty.

China's leaders won't want to be seen giving "charity" to countries richer than their own.

Mr Regling, who is chief executive of the European Financial Stability Facility (EFSF), said he was not negotiating with China as a potential investor but holding consultations to decide the terms for raising the money.

"Don't expect any precise outcome of our talks," he said, quoted by AFP news agency.

"I cannot say today, and it's certainly far too early to say what kind of amounts might be envisaged."
He said China had been a regular buyer of EFSF bonds in the past.

He would present the fund's bonds as a potential commercial investment to China, he said, adding that Beijing regularly needed to find safe investments for its trade surpluses.

"I am optimistic that we will have a longer term relationship," he said.

Chinese Vice Finance Minister Zhu Guangyao said there was work still to be done.

"We need to wait for the technicalities to be clear and also to carry out serious studies before we can decide on investment," he said, quoted by AFP.

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If we have the ability to help them then we should, but there is no feeling of pride in that”

Xu Juan International trade firm employee in Beijing

• Why would China want to help Europe?

"We hope that all these technical and specialised arrangements can be thrashed out at an early date and can be implemented and feasible. That will be very important for the effectiveness" of the fund.

The President of the World Bank, Robert Zoellick, has said he believes China will invest in Europe only if there are incentives for it to do so.

"I don't think that China will just come in as a white knight to try to provide money just to bail out Europeans," he told the BBC.

But investor Jim Rogers said China was prepared to help.

"From China's point of view, it's cheap foreign aid. They'll buy goodwill. I guess they'll put up some money," he said on BBC Radio 4's Today programme.

The suggestion that China should use its financial clout to assist the eurozone met with mixed reactions on the streets of Beijing.

"If we have the ability to help them then we should, but there is no feeling of pride in that," said Xu Juan - a 27-year-old employee of an international trade firm.

We need to focus on doing a good job on developing our own country."

Wang Xiaodong, a 23-year-old univeristy student, said "With the global economy everybody prospers together or becomes weaker together, so we just have to endure this tough time together."

The framework for the new EFSF bailout fund is to be put in place in November.

Germany, as the largest economy in eurozone, is expected to be the largest contributor.

Asian markets rose for a second day on Friday and bank stocks in Europe continued to rally, a day after the deal was reached.

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Bleed the Foreigner!

Harold James

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PRINCETON – Today, the world is threatened with a repeat of the 2008 financial meltdown – but on an even more cataclysmic scale. This time, the epicenter is in Europe, rather than the United States. And this time, the financial mechanisms involved are not highly complex structured financial products, but one of the oldest financial instruments in the world: government bonds.

While governments and central banks race frantically to find a solution, there is a profound psychological dynamic at work that stands in the way of an orderly debt workout: our aversion to recognizing obligations to strangers.

The impulse simply to cut the Gordian knot of debt by defaulting on it is much stronger when creditors are remote and unknown. In 2007-2008, it was homeowners who could not keep up with payments; now it is governments.

But, in both cases, the lender was distant and anonymous. American mortgages were no longer held at the local bank, but had been repackaged in esoteric financial instruments and sold around the world; likewise, Greek government debt is in large part owed to foreigners.

Because Spain and France defaulted so much in the early modern period, and because Greece, from the moment of its political birth in 1830, was a chronic or serial defaulter, some assume that national temperament somehow imbues countries with a proclivity to default. But that search for long historical continuity is facile, for it misses one of the key determinants of debt sustainability: the identity of the state’s creditor.

This variable makes an enormous difference in terms of whether debt will be regularly and promptly serviced. The frequent and spectacular early modern bankruptcies of the French and Spanish monarchies concerned for the most part debt owed to foreigners.

The sixteenth-century Habsburgs borrowed – at very high interest rates – from Florentine, Genovese, and Augsburg merchants. Ancien régime France developed a similar pattern, borrowing in Amsterdam or Geneva in order to fight wars against Spain in the sixteenth and seventeen centuries, and against Britain in the eighteenth.

The Netherlands and Britain, however followed a different path. They depended much less on foreign creditors than on domestic lenders. The Dutch model was exported to Britain in 1688, along with the political revolution that deposed the Catholic James II and put the Dutch Protestant William of Orange on the English throne.

Indeed, the Glorious Revolution enabled a revolution in finance. In particular, recognition of the rights of parliament – of a representative assembly – ensured that the agents of the creditor classes would have permanent control of the budgetary process.

They could thus guarantee – also on behalf of other creditors – that the state’s finances were solid, and that debts would be repaid. Constitutional monarchy limited the scope for wasteful spending on luxurious court life (as well as on military adventure) – the hallmark of early modern autocratic monarchy.



In short, the financial revolution of the modern world was built on a political order – which anteceded a full transition to universal democracy – in which the creditors formed the political class. That model was transferred to many other countries, and became the bedrock on which modern financial stability was built.

In the post-1945 period, government finance in rich industrial countries was also overwhelmingly national at first, and the assumptions of 1688 still held. Then something happened. With the liberalization of global financial markets that began in the 1970’s, foreign sources of credit became available. In the mid-1980’s, the US became a net debtor, relying increasingly on foreigners to finance its debt.

Europeans, too, followed this path. Part of the promise of the new push to European integration in the 1980’s was that it would make borrowing easier. In the 1990’s, the main attraction of monetary union for Italian and Spanish politicians was that the new currency would bring down interest rates and make foreign money available for cheap financing of government debt.

Until the late 1990’s and the advent of monetary union, most government debt in the European Union was domestically held: in 1998, foreigners held only one-fifth of sovereign debt.

That share climbed rapidly in the aftermath of the euro’s introduction. In 2008, on the eve of the financial crisis, three-quarters of Portuguese debt, half of Spanish and Greek debt, and more than 40% of Italian debt was held by foreigners.

When the foreign share of debt grows, so do the political incentives to impose the costs of that debt on foreigners. In the 1930’s, during and after the Great Depression, a strong feeling that the creditors were illegitimate and unethical bloodsuckers accompanied widespread default. Even US President Franklin Roosevelt jovially slapped his thigh when Reichsbank President Hjalmar Schacht told him that Nazi Germany would default on its external loans, including those owed to American banks, exclaiming, “Serves the Wall Street bankers right!” In Europe today, impatient Greeks have doubtless derived some encouragement from excoriations of bankers’ foolishness by German Chancellor Angela Merkel and French President Nicolas Sarkozy.

The economists’ commonplace that a monetary union demands a fiscal union is only part of a much deeper truth about debt and obligation: debt is rarely sustainable if there is not some sense of communal or collective responsibility. That is the mechanism that reduces the incentives to expropriate the creditor, and makes debt secure and cheap.

At the end of the day, a collective, burden-sharing Europe is the only way out of the current crisis. But that requires substantially greater centralization of political accountability and control than Europeans seem able to achieve today. And that is why many of them could be paying much more for credit tomorrow.

Harold James is Professor of History and International Affairs at Princeton University and Professor of History at the European University Institute, Florence. He is the author of The Creation and Destruction of Value: The Globalization Cycle.

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Why the US is the greatest threat to Lagarde at the IMF?

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"It's a victory for France," President Nicolas Sarkozy said of Christine Lagarde's appointment as the new head of the International Monetary Fund.

Christine Lagarde leaves a private TV studio after appearing on prime time news in Boulogne Photo: REUTERS

By Richard Blackden, US Business Editor

It should come as no surprise that the unpopular French leader is trying to put a positive spin on losing his highly-regarded finance minister. And, in one sense, Sarkozy is spot on.

Lagarde becomes the IMF's fifth French leader, and her appointment ensures that the Gallic republic keeps a powerful voice at an institution that has made a comeback thanks to the financial crisis. But Lagarde won't have appreciated her former boss airing his sentiment in public. The 55-year old will start her first day in the job next Tuesday with three question marks hanging over her appointment.

The first and least troublesome one is some inevitable concern within the IMF that she's not an economist. Lagarde trained as a lawyer and spent 25 years working at US law firm Baker & McKenzie before moving into politics in 2005. Some of this will be intellectual snobbery, but some will be legitimate concern over whether she's qualified for the job. She's regarded as highly intelligent and the fund already has an army of economists that matters can be delegated to.

The second is whether her selection was a stitch up. And it was. Europe still wields a disproportionately large amount of votes at the IMF's top table - a gift from history that the continent is understandably reluctant to relinquish. There's nothing she can do about that, and Lagarde has already pledged to make changes to the voting system so it better reflects the shifting balance of economic power in the world.

The third is by far the most serious. As the French finance minister intimately involved in Europe's debt crisis during the last 12 months, will she be able to give the IMF an independent voice and protect the interest of its creditors? Lagarde certainly thinks so. During her job interview last week she told the IMF's Executive Board that "I will not shrink from the necessary candour and toughness in my discussions with European leaders." Adding that "there is no room for benevolence when tough choices must be made."

The former lawyer spent much of the past month visiting China, India and Brazil to assure them that she will not throw good IMF money after bad to solve Europe's debt dilemma. The fund, which means its donors, is supplying about a third of the €110bn that was pledged to Greece as part of the first bail-out in May, 2010. Such assurances appear to have won over those three economic heavyweights, who declared for her rather than Agustin Carstens, the head of Mexico's central bank, and Lagarde’s only rival.

Victory, though, only came when the Obama administration threw its weight behind Lagarde this week. US Treasury Secretary Tim Geithner sang the praises of his former counterpart and new neighbour in Washington DC. But it's politicians in the US capital, rather than Beijing, Delhi or Sao Paulo, that pose the greatest threat to Lagarde.

Despite the warm and no doubt genuine words from Geithner, The White House is increasingly frustrated at Europeans' handling of their own debt debacle. Its latest flaring comes as the US economic recovery is losing momentum, and Obama is trying to wrestle back the political initiative from a Republican party emboldened by the recent US slowdown. The irritation was likely behind an unusual public rebuke to European leaders from Geithner last week when he said it would be better if they could speak with one voice.

A still bigger threat comes from Congress. The Obama administration struggled to push through an extra $108bn in funding for the IMF in June 2009. If bail-out was a toxic word in Washington then, it has only become more so since. So far the contributions from the IMF, where the US is the biggest single donor, have raised relatively few heckles in the House of Representatives or Senate. But with Republican candidates currently vying for the right to challenge Obama next year, the chances are that will change. And any money required from the IMF for Greece's second bail-out will receive far more political scrutiny in the country that will have to dig deepest into its own pockets.

It's to her new neighbours in Washington, more than anyone else, that Lagarde needs to prove that her appointment is no victory for France.