Monday, March 12, 2012

426 EU Austerity fails: ECB must supply money to governments - Ellen Brown

EU Austerity fails: ECB must supply money to governments - Ellen Brown

(1) EU Austerity fails: ECB must supply money to governments - Ellen Brown
(2) Three options for the euro zone: monetisation, default, or break-up
(3) ECB Support May Prove `Critical' for Spain as Crisis Worsens, Buiter Says
(4) Ambrose: Eurozone faces fresh wave of sovereign defaults and bank failures
(5) Ambrose: Germany must accept EU as a debt union, funded by Eurobonds
(6) Privatized Heathrow is more concerned with being a shopping mall than snow-plowing runways
(7) Heathrow "incompetence" staggers airlines
(8) EU warns the City: We want to know who is short-selling what

(1) EU Austerity fails: ECB must give money to governments - Ellen Brown

From: Ellen Brown <> Date: 23.12.2010 05:09 PM

Austerity Fails in Euroland: time for some "Deficit Easing"

The Huffington Post

Ellen Brown

December 22, 2010

The Greek bailout was supposed to be an isolated case, a test of the EU's ability to quarantine an infected member, preventing it from spreading "debt contagion."

But that was before Ireland failed. Ireland was the poster child for how to conduct a successful austerity program. Unlike the Greeks, who were considered profligate spendthrifts, the Irish did everything their creditors asked. The people sacrificed to pay for the excesses of their banks, but still the effort failed. Ireland was the second domino to fall to an IMF/EU bailout. On December 17, Moody's Investors Service rewarded it for voting to accept the "rescue" package with a five-notch credit downgrade, from AA2 to BAA1, with warnings that further downgrades could follow.

Spain is rumored to be the next domino poised to fall. If it falls, it could bring down the EU.

A Design Flaw in the Euro Scheme?

Richard Douthwaite is co-founder of an Irish-based economic think tank called FEASTA (the Foundation for the Economics of Sustainability). He reports that the collective deficit of eurozone countries was a very acceptable 1.9% in 2008. It shot up to 6.3%, exceeding the cap imposed on EU members (3% of GDP), only in 2009. This spike was not due to a sudden surge in government spending. It was due to the global financial crisis, which shrank the money supply globally. Douthwaite writes:

[A] shrinking money supply means shrinking business profits simply because there is less money available to appear in corporate accounts at the end of the year. This means less tax is paid.

When taxes go down, revenues go down; but budgets don't.

In an article called "Understanding Modern Monetary Systems," Cullen Roche explains that the Euro system is the modern equivalent of the gold standard. Both are "revenue constrained." Countries on these restrictive systems cannot expand their revenues because there is nowhere to get the money. They cannot get more Euros except by borrowing from each other, and all the member countries are in debt. In June 2010, 26 of 27 EU countries -- all but Luxembourg -- were on the "debt watch list" for exceeding the 3% cap. Euros can get shuffled around to keep the game going; but in the end, as Shakespeare said, the eurozone countries are "as two spent swimmers that do cling together," pulling each other down.

Douthwaite writes:

[I]ndividual eurozone countries [cannot] create money out of nothing by quantitative easing. Only the European Central Bank has that power but it has not yet used it to inject money into the system without withdrawing an equal amount. Consequently, every cent in use in eurozone economies has to have been borrowed by someone somewhere, at home or overseas. As a result, while countries with their own currencies can handle a debt-to-GDP ratio of over 100% because they have the tools to do so (Japan's is approaching 200%), countries using a shared currency must keep well below that figure unless they can agree that their shared central bank should use its interest rate, exchange rate and money creation tools in the way that a single country would.

Roche comments:

The Euro system, which is also a single currency system (like the gold standard) adds significant confusion to the current environment and is often confused as a flaw in fiat money. In reality, the Euro proves why single currency systems are inherently flawed.

By a "single currency system," Roche means multiple nations sharing a single currency (whether Euros or gold). Governments need the ability to expand their own money supplies as required to meet the needs of their own economies. Without that flexibility, they are reduced to trying to balance their budgets through brutal austerity measures. In a November 19th article in the UK Guardian called "There Is Another Way for Bullied Ireland," Mark Weisbrot observed:

The European authorities could... allow for Ireland to undertake a temporary fiscal stimulus to get their economy growing again. That is the most feasible, practical alternative to continued recession.

Instead, the European authorities are trying what the IMF... calls an "internal devaluation". This is a process of shrinking the economy and creating so much unemployment that wages fall dramatically, and the Irish economy becomes more competitive internationally on the basis of lower unit labour costs...

Aside from huge social costs and economic waste involved in such a strategy, it's tough to think of examples where it has actually worked...

If you want to see how rightwing and 19th-century-brutal the European authorities are being, just compare them to Ben Bernanke, the Republican chair of the US Federal Reserve. He recently initiated a second round of "quantitative easing", or creating money -- another $600bn dollars over the next six months. And... he made it clear that the purpose of such money creation was so that the federal government could use it for another round of fiscal stimulus. The ECB could do something similar -- if not for its rightist ideology and politics.

Deficit Easing

For Ireland, Douthwaite recommends a modified form of quantitative easing he calls "deficit easing." He explains:

Both approaches involve central banks creating money. With quantitative easing, the new money is generally used to buy securities from the banking system, thus providing the banks with more money to lend. Unfortunately that is where problems have been arising in the US and the UK. Because the public has been unwilling to borrow, or the banks have been unwilling to lend, quantitative easing has not increased the supply of money in circulation in the US, where M3 began to decline in the second half of 2009 and was still falling a year later...

Deficit-easing avoids this 'won't-borrow-won't-lend' bottleneck by giving the new money to governments to spend into use, or to pass on to their citizens to reduce their own debts or to invest in approved ways.

The U.S. Federal Reserve may be considering a similar approach. So says Professor David Blanchflower, a former member of the Bank of England's Monetary Policy Committee, who stated on October 18 that he had been at the Fed in Washington for one of its occasional meetings with academics.

"Quantitative easing remains the only economic show in town," he said, "given that Congress and President Barack Obama have been cowed into inaction."

What will the Fed buy with its quantitative easing tool?

"They are limited to only federally insured paper," said Blanchflower, "which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing."

The Fed could buy short-term municipal bonds from the states, easing the states' budget crises. It could set up a facility for bailing out the states at very low interest rates, along the lines of those facilities set up to bail out the Wall Street banks.

A similar plan might be pursued in the eurozone. The European Central Bank (ECB) has already engaged in something equivalent to "quantitative easing." In a post titled "ECB credit easing by buying debt from Greece and Spain analogous to Fed buying California and Illinois munis," Ed Harrison remarks:

When the European experiment threatened to unravel, the ECB chose the nuclear option and stepped into the breach to start buying up the debt of its weakest debtor states. Now, the ECB claims these actions are unsterilized i.e. it is not just printing money. But I have my doubts. In any event, the ECB is the New "United States of Europe" as Marshall Auerback puts it.

Douthwaite adds:

The neatest solution would be for the European Central Bank to create money and to give it (rather than lend it) to governments in proportion to their populations. This would allow further public spending cuts to be avoided and, in countries with relatively small budget deficits, national debts to be reduced.

Printing Euros and giving them rather than lending them to the member countries would be akin to the "Greenback solution" -- simply allowing governments to issue the money they needed directly, interest-free and debt-free. As Thomas Edison observed:

If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way.

To avoid inflating prices when the economy reaches full employment, the money could be taxed back to the government or returned as user fees for public services.

Restoring Credit with a Publicly-owned Bank: The Model of the Bank of North Dakota

There is another possible solution to this dilemma. Neither states in the U.S. nor those in the eurozone can print their own money, but they CAN own banks, which can create bank credit on their books just as all banks do. Most of our money is now created by banks in the form of bank credit, lent at interest. Governments could advance their own credit and keep the interest. This would represent a huge savings to the people. Interest has been shown to make up about half the cost of everything we buy.

Only one U.S. state actually owns its own bank - North Dakota. As of last spring, North Dakota was also the only U.S. state sporting a budget surplus. It has the lowest unemployment rate in the country and the lowest default rate on loans. North Dakota has effectively escaped the credit crisis.

The Bank of North Dakota (BND) is a major profit generator for the state, returning a 26% dividend in 2008. The BND was set up as "North Dakota doing business as the Bank of North Dakota," making the assets of the state the assets of the bank. The BND also has a captive deposit base. By law, all of North Dakota's revenues are deposited in the BND. Municipal government and private deposits are also taken. Today, the BND has $4,000 in deposits per capita, and outstanding loans of roughly the same amount.

Extrapolating those figures to Ireland's population of 4.2 million, a publicly-owned Irish banking system might generate credit of $16.8 billion. That would be enough to fund most of Ireland's deficit of 14.4 billion Euros (19.6 billion USD), and this money would effectively be interest-free, since the government-owned bank would return its profits to the state. Funding through its own bank would remove most of Ireland's deficit from the private bond market, which is highly vulnerable to manipulation, speculation and crippling downgrades.

Alternatively, this bank credit for building sustainable infrastructure and putting people back to work.

Governments everywhere are artificially constrained by having to borrow at market interest rates, which means whatever interest banks can extract. Governments can throw off the shackles of this scheme, in which private banks create the national money supply and lend it at interest, by forming publicly-owned banks. These banks can then advance the credit of the nation to the nation, interest-free. And if this credit is advanced against future productivity, prices will not inflate. Supply (goods and services) will rise along with demand (money), keeping prices stable.

(2) Three options for the euro zone: monetisation, default, or break-up

Edward Harrison | 29 NOVEMBER 2010 11:05 ET

A few thoughts about the euro crisis and the psychology of change

So what's next? Here are three options: monetisation, default, or break-up.


This approach is the easiest and therefore a very likely outcome. Let me frame what I think the issues are and how to go about it. Note, this is not an advocacy piece so I am framing what could occur more than what I would recommend.

The monetisation scenario ostensibly involves an attempt to separate liquidity from solvency issues by using the currency creator's power to stand behind debt obligations with a potentially unlimited supply of liquidity. This is the traditional lender of last resort role that a central bank is expected to play. For example, the Fed played this role in buying up financial assets during the crisis in 2008 and 2009. Of course, it did so recklessly by buying up dodgy assets at inflated prices instead of good assets at penalty prices so as to discriminate between the illiquid and the insolvent.

Now that the credit crisis has moved on to sovereign debt, the central bank can play this role with sovereign debt as well. The best way to accomplish this task would be to start buying enormous quantities of sovereign debt, inducing a huge shift in the price/interest rate of those assets. Only afterwards, the ECB would announce that it was prepared to supply unlimited liquidity to stand behind these assets at specific target interest rates and would do so at the most inconvenient moments for speculators wishing to make a quick euro. (Update: see comments of a similar nature after this was written from Willem Buiter at the bottom.)

The point would be twofold:

1.Market participants would understand that the ECB had unlimited means to back up threats with action, the stress clearly on the word unlimited.

2.Market participants would understand that the ECB intended to penalise speculators by targeting them with its unlimited liquidity.

As Willem Buiter first mentioned last November, the ECB will not risk its anti-inflationary credibility to monetise the debt of smaller euro zone countries like Greece or Ireland. This is why they were forced to take a bailout. On the other hand, it could be a possibility for Spain because Spain is simply too large to bail out in the way that Greece and Ireland were bailed out.

The immediate impact of this kind of action would be a rise in the euro-denominated gold and silver price, currency depreciation more generally, and increased inflation expectations. So this is a beggar thy neighbour economic policy – competitive currency devaluation, if you will. Clearly, countries like the UK and the US will choose inflation and exchange rate depreciation instead of default as a way of dealing with the sovereign debt problem. That is certainly part of what QE2 is about.  If forced, the ECB could go this route as well.

Just as central banks target short-term interest rates via the Fed Funds market with threats of an unlimited supply of liquidity, central banks could in theory do the same for longer-term rates. During our discussion about quantitative easing in the US, Scott Fullwiler pointed out to me that offering a credible commitment to defend a specific target rate with unlimited liquidity could require less liquidity in practice. That is the Fed's experience from the Fed Funds market.

I see this as only a fix for the liquidity issues – and not as a fundamental solution in that sense. For this to work as a longer-term solution, this carrot would need to be offset by some sort of stick regarding budget deficits and bank capital. Otherwise, the moral hazard this invites will make one unsuccessful in solving the fundamental issues.


The second path is more tricky and therefore not likely in the near-term unless it is forced upon the Europeans. As Edward Hugh pointed out yesterday, Greece is not headed in the right direction.  Default is inevitable. I don't think the default issue is controversial anymore. The question now is who defaults and under what conditions.  What Europe should strive for is a default by the 'right' players under the most benign conditions.  And so that means this option is not mutually exclusive with the first. You could have a monetisation-default scenario whereby the monetisation leads to the 'right' players defaulting i.e. the insolvent as opposed to the illiquid.

As I mentioned, Greece is clearly not making the grade and will be unable to lower its debt to GDP through internal devaluation and austerity without serious growth via exports and currency depreciation. There are almost no circumstances in which all of these positive factors can come together.  Ireland, on the other hand, despite having socialised its banks losses like Iceland, is in a fundamentally better position than Greece. Its debt-to-GDP is lower, it's structural deficit is also lower, and it has good export competitiveness. It is the banks in Ireland which are insolvent – and these losses, having been socialised, are threatening the sovereign with insolvency too. The right thing to do would be to de-couple the bank/sovereign issue by rescinding the senior and junior bank debt guarantees. And politically, this would also be favourable with the Irish people as well.  Instead, with the bailout, we are seeing the government raid pension funds  i.e. the 'people's money' to pay off the debts of the banks, 'the foreigners' money.'  That is a solution built for social and political upheaval. ...


I have always seen a sovereign default and restructuring within the euro zone as more likely than a break-up of the euro zone. ...

My view is that some combination of monetisation and default is the most likely scenario for Europe.

Update 2300 ET: Apparently Willem Buiter has made similar comments regarding monetisation. From Bloomberg:

Buiter argued that the ECB must be prepared to wield its power as the euro region's most powerful financial body and "take on more of the burden of supporting ailing banks and sovereigns."

"As the sole source of unlimited liquidity and as an institution that can take decisions without the need for political or popular approval, it is the only institution that can take actions of sufficient size and with sufficient speed to stave off major financial instability," Buiter said.

Full story here <>.

(3) ECB Support May Prove `Critical' for Spain as Crisis Worsens, Buiter Says

By Gabi Thesing - Tue Nov 30 00:01:00 GMT 2010

The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup Inc. Chief Economist Willem Buiter said.

"Once Spain needs assistance, the support of the ECB will be critical," Buiter said in a note to investors yesterday. A Spanish crisis would "stretch the resources" of the bailout fund set up in May by European governments "perhaps beyond its current limits."

Spanish bonds slid by the most since the euro's debut yesterday as a rescue package for Ireland failed to stop contagion spreading through the euro region. While the ECB bought the most euro-region government bonds in two months last week, the strategy has been criticized by some policy makers for threatening to compromise the central bank's independence.

The yield on Spain's 10-year government bond jumped 25 basis points to 5.42 percent yesterday and the cost of insuring Portugal against default rose to a record. Spanish Finance Minister Elena Salgado said Nov. 28 that her country has no plans to ask for aid.

As EU leaders struggle to contain market turmoil, attention is turning once more to the ECB. The central bank took the unprecedented step in May of buying government bonds as part of a broader EU package to shore up the euro. While the program aims to smooth the functioning of bond markets, Bundesbank President Axel Weber says there's no evidence this has been successful. On Nov. 19, he said the policy should be stopped "sooner than later."

Greater Burden

ECB President Jean-Claude Trichet will brief reporters on the central bank's next steps after its rate decision on Dec. 2. The Frankfurt-based ECB completed 1.3 billion euros ($1.8 billion) of bond purchases last week, the most since the end of September, taking the total bought to 67 billion euros.

Unlike the Federal Reserve and the Bank of England, the ECB currently sterilizes its bond purchases to neutralize their impact on overall money supply.

Buiter argued that the ECB must be prepared to wield its power as the euro region's most powerful financial body and "take on more of the burden of supporting ailing banks and sovereigns."

"As the sole source of unlimited liquidity and as an institution that can take decisions without the need for political or popular approval, it is the only institution that can take actions of sufficient size and with sufficient speed to stave off major financial instability," Buiter said.

To contact the reporter on this story: Gabi Thesing in London at

To contact the editor responsible for this story: John Fraher at

(4) Ambrose: Eurozone faces fresh wave of sovereign defaults and bank failures

Citigroup fears fresh wave of sovereign defaults and bank failures in eurozone

Citigroup has warned of a fresh wave of bank failures and a string of sovereign defaults in Europe unless EU leaders come up with a credible response to the crisis.

By Ambrose Evans-Pritchard, International Business Editor  6:18AM GMT 22 Dec 2010

Professor Willem Buiter, the bank’s chief economist and a former UK rate-setter, said the eurozone is paralysed by a "game of chicken" between the European Central Bank and EMU governments in charge of fiscal policy.

Both sides are trying to shift responsibility onto the other for shoring up Southern Europe and Ireland, raising the risk of widening contagion. "The market is not going to wait until March for the EU authorities to get their act together. We could have several sovereign states and banks going under. They are being far too casual." he said.

"This is a combined sovereign and banking crisis and that is a poisonous cocktail. The policy response has been woefully inadequate. There is a very small pot of money for a very big crisis," said Dr Buiter.

Dr Buiter described the EU’s rescue fund as an "insolvency machine" because it charges punitive rates of 6pc, preventing high-debt countries from clawing their way out of their trap. "I don’t know why they bothered to create it," he said.

Mark Schofield, Citigroup’s global head of interest rate strategy, said Portugal will need an EU rescue soon and that it is "highly likely that Spain will go the same way". This risks over-powering the ?440bn bail-out fund.

"Restructuring of some sovereign debt is inevitable. There is a chance that Spain could still make it, but the debt trajectory looks unsustainable if a broader EU-wide solution isn’t found," he said.

Bob Diamond, the next chief executive of Barclays, echoed fears of further eurozone ructions. He told Jeff Randall at Sky News that there is a "distinct possibility’ that one or more countries will be forced out of the euro, though the rest of EMU will hold together.

Moody’s warned that it may downgrade Portugal’s A1 rating by one or two notches on growth worries, but said the country’s solvency is "not in question".

Europe’s leaders vowed to do "whatever it takes" to save monetary union at last week’s summit but offered no plan. They ruled out an increase in the bail-out fund, or the creation of eurobonds.

Dr Buiter said the ECB has an "intangible asset" of ?2 trillion to ?4 trillion from its powers to create money and could intervene on much a larger scale if it wished, but this would blur the lines of monetary and fiscal policy. It is anathema to Germany.

"German politicians view the monetisation of sovereign debt as the road to Weimar. They expect the ECB to be the heir to the Bundesbank and not the Reichsbank," he said. The ECB insists that its bond purchases are "sterilised" – meaning that they do not add stimulus or constitute quantitative easing – but this is a disputed point.

(5) Ambrose: Germany must accept EU as a debt union, funded by Eurobonds

Self-righteous Germany must accept a euro-debt union or leave EMU

If Germany and its hard-money allies genuinely wish to save the euro – which is open to doubt – they should stop posturing, face up to the grim imperative of a Transferunion, and desist immediately from imposing their ruinous and reactionary policies of debt deflation on southern Europe and Ireland.

By Ambrose Evans-Pritchard, International Business Editor  9:00PM GMT 19 Dec 2010

One can sympathise with the German people. Their leaders in the 1990s told them "famine in Bavaria" was more likely than the preposterous suggestion that Germany might have to bail out countries as a result of EMU.

But events have moved on and, rather than striking tones of Calvinist righteousness, the Teutonic bloc might do well to acknowledge equal responsibility for the capital flows, trade imbalances, and cumulative errors that caused the EMU debacle, and therefore accept that the honourable course is to meet the struggling south halfway.

Readers may have a better menu, but here is my own rough sheet: a debt union, funded by Eurobonds; a calibrated jubilee on traditional IMF lines for Ireland, Greece, Portugal, and if necessary Spain, to occur in parallel with austerity cuts; and a monetary blitz by the European Central Bank to prevent the victims tipping into core deflation, even this stokes inflation of 4pc or 5pc in northern Europe.

It beggars belief that the ECB should continue to allow the contraction of the M3 money supply and credit to private firms. Since EU leaders have already shown their willingness to ram through treaty changes without full ratification under Article 48 of the Lisbon Treaty, they can likewise bring ECB ideologues to heel with a new mandate.

If the Teutonic bloc cannot accept such a political revolution, it should withdraw from monetary union before inflicting any more damage to the social fabric of southern Europe, or at least allow a 30pc appreciation within EMU by creating a Doppelmark.

An internal adjustment could be done overnight, if necessary with temporary capital controls. The residual euro states would undergo a relatively seamless devaluation to levels that reflect the reality of current account deficits and labour productivity, yet their existing contracts in euros would be upheld.

Creditor states – and Britain – would have to stand ready to recapitalise their own banks at great cost to fortify them against the systemic shock of haircuts on the entire debt stock of peripheral EMU. True burden-sharing at last.

Needless to say, EU leaders failed to grasp the nettle at last week's summit, despite a pre-insurrectional mood in Athens where one former minister was bludgeoned by anarchists outside parliament, and in Rome where a police officer was almost lynched in political violence that left 80 people injured.

Not even the warning shot of Spain's debt auction on Thursday seemed to break the impasse. Chancellor Angela Merkel must know that the Spanish state, juntas, and banks cannot refinance ?300bn (£254bn) next year at a bearable cost if the Tesoro is already paying a decade-high of 5.45pc to sell 10-year bonds, yet she continues to play for time she does not have.

"Behind the curve", was the understated rebuke by IMF chief Dominique Strauss-Kahn.

His own IMF team has indicated the policy that it is being told to enforce as junior partner of the EU rescues. It warned of "adverse fiscal and financial feedback loops" in Ireland, in its latest report.

"A prolonged period of deep recession could weaken loan repayment capacity of households and businesses and increase bank losses beyond current projections, leading the economy into a negative spiral. Wage and price deflation – coupled with contraction in activity – could have a powerful negative effect on debt dynamics," it said.

"There are significant risks that could affect Ireland's capacity to repay the Fund," it said. Indeed, so why is the IMF board giving a green light to this obscurantism?

The EU torture policy of thrusting yet more debt on crippled states already caught in a debt trap – and then forcing them even deeper into downward spiral with a 1930s policy of wage cuts and "internal devaluation" – is an intellectual disgrace.

Let it never be forgotten that Ireland and Spain are struggling because EMU caused a collapse in real interest rates to -1pc or -2pc, setting off an uncontrollable boom. This is what the Gold Standard did to Germany in the late 1920s, when US banks funded a German credit bubble. That ended with the destruction of German democracy.

Klaus Regling, the EU's chief bail-out officer, said Eurosceptics will "eat their words again" as the policy is vindicated. Excuse us, Dr Regling, but we have not yet eaten any words on the fundamental critique of EMU. Perhaps it is unkind to point out that Dr Regling was the European Commission's director-general of economic affairs from 2001 to 2008, more or less spanning the incubation period of the catastrophe now at hand.

To borrow the immortal line from Watergate: what did you know and when did you know it?

(6) Privatized Heathrow is more concerned with being a shopping mall than snow-plowing runways

The Secret Behind the Travel Mayhem

by Clive Irving  

Why is five inches of snow shutting down London's Heathrow airport? Because it's more concerned with being a mall than plowing runways, writes aviation expert Clive Irving.

One airport sits at the center of Europe's travel chaos, spreading its failures like a raging virus throughout the international routes—crippling trans-Atlantic flights, aborting connections throughout Europe and the Middle East and causing cancellations as far away as Sydney, Hong Kong, and Singapore. It's the world's busiest airport for international flights: London's Heathrow. If you wanted to choose the perfect choke point to cripple the world's air traffic, this is it.

As an example of basic strategic policy, you might think that, given its importance, the ability of Heathrow not simply to wreck the holiday travel plans of hundreds of thousands of people but to undermine economies, disrupt international air cargo and, most significantly, to visit disaster on the travel industry, plans would be in place to ensure that it can function after a five-inch snowfall. After all, terrorists would be delighted to have wrought such harm.

Here we are, though, four days after the weekend shutdown of Heathrow and even now the airport is still barely functional.

And it's all because the people in charge of Heathrow could not muster the resources to plow two runways and clear ice and snow from terminal gates—not exactly rocket science and something hundreds of airports have to face on a regular basis in winter. Prime Minister David Cameron has now even offered troops to help clear the runways.

The fundamental reason for this failure is hiding in plain sight—it's not the runways, not the airplanes and not even the responsibility of the airlines operating out of Heathrow. The most telling clue lies in Terminal Five, which was purpose-built for British Airways. What do you see once you check-in? Not an airport terminal, but a shopping mall. There are two enormous floors with scores of stores, ranging from luxury franchises to electronics, Scottish whiskey and perfumes—as many perfume counters as you could imagine under one roof.

This happened because in the late 1980s the Brits realized that an airport could be an entirely new kind of profit center. What began as a so-called duty-free opportunity, a few stores selling highly taxed items like whiskey and cigarettes, suddenly expanded into a shopper's honey trap, a perfect place for merchandise with its own captive audience, bored people waiting for a flight. The management of British airports was privatized and turned over to a company called the British Airports Authority—a name implying that it was a professional aviation manager and not, as it became by stealth, a business dominated by marketers.

Suddenly, every terminal at the two main London airports, Heathrow and Gatwick, was remodeled around the shopping mall. The airports were, in effect, re-purposed, and the actual management and running of a business centered on flying people rather than selling to them became secondary. In fact, this model became so lucrative that it was followed by other airports around the world—but never in a way that so strikingly distorted the management priorities.

As a result, the BAA became a prized, highly profitable business, much admired beyond the U.K. It caught the eye of an ambitious Spanish multinational—until then a specialist in building highways—called Ferrovial. In 2006 Ferrovial bought control of the BAA.

Then the problems really began. Passengers complained of poor maintenance, filthy toilets, chaotic security lines, and poor communications. The full realization of what Ferrovial was up to came in March, 2008, with the opening of Terminal 5. This supposed state-of-the art building, long delayed because of planning problems, was the scene of embarrassing systems failures in its first weeks—thousands of bags were lost, flights were delayed or canceled, and it became an infamous public-relations disaster for British Airways.

More thought had gone into burnishing the shopping mall, and providing top-end restaurant franchises, than in actually making sure that passengers would have a seamless experience from check-in to the gate.

After this debacle, the jackpot began to unravel for Ferrovial. So great was the criticism of their performance that the British government forced them to give up Gatwick, which they had to sell at a loss of around $400 million. That, in turned, left them determined to squeeze as much profit as possible out of those malls at Heathrow. The BAA chief executive, Colin Matthews, opened his heart to travelers this week on BBC radio: "It's absolutely distressing and heart-breaking to have been in the terminals and confronted with individuals, each with their stories of really sad and disappointing outcomes."

Outcomes? While Ferrovial was loading up the Heathrow stores with all their Christmas goodies it hadn't bothered to check whether it had enough plows to deal with two runways if, by chance, it happened to snow. Or enough de-icing fluid to get the airplanes out of the gates. Or anything else fundamental to fitness of mission. The cost of that negligence is almost incalculable.

The British government—and the body governing international air travel, IATA— need now to act, and fast. They must make sure that the priorities at Heathrow are not given to cashmere sweaters and single malt whiskies but to having an airport that works. People go to airports to fly.

Clive Irving is senior consulting editor at Conde Nast Traveler, specializing in aviation—find his blog, Clive Alive, at CliveAlive.Truth.Travel.

(7) Heathrow "incompetence" staggers airlines

Posted Monday, 20 December, 2010 - 11:31 by Gary Noakes

Heathrow airport operator BAA faces mounting anger from airlines and government as the chaos at Britain's leading gateway continues.

A major carrier at the airport said airlines chiefs were "staggered at the incompetence" of what is normally the world's busiest international airport.

"We are absolutely flabbergasted at their inability to de-ice, keep runways open and in terms of their organisation and ability to give out information," said the source. "We do conference calls around our network and when our colleagues hear that we have two inches of snow and there's disruption they just laugh at us."

BAA chief executive Colin Matthews today told the BBC he "couldn't be more sorry", for the situation at Heathrow, adding that it "may well be" that BAA needed to buy more equipment like snow ploughs.

BAA has in the past attracted criticism for investing in lucrative retailing at its airports instead of the operational side. Heathrow's position as the UK's premier business airport means government anger is increasing because it is damaging the image of the UK. The airport has been severely affected because although runways are open, aircraft cannot leave stands due to the amount of ice and snow around them.

The airline source explained: "Heathrow simply failed to keep up with the situation in terms of the length of time needed to de-ice aircraft on the stands and to move it off – you need to move two to three tonnes of snow to move each one. It will be a number of days before we get back to normal."

BAA's Heathrow website detailing live departures and arrivals was this morning not functioning and the operator was putting out information via Twitter.

"There are still severe delays and cancellations, check with the airline before coming to the airport," said a Heathrow spokeswoman. "We have hundreds of people working on the airfield. It has been a challenge for our equipment to get rid of the ice with the temperatures we are experiencing."

The situation is not expected to improve as temperatures will not move above freezing and more snow is expected during this evening's rush hour.

Meanwhile, Gatwick airport has returned to almost normal operation. Gatwick will today see almost 700 departures and arrivals after securing extra snow moving equipment over the weekend. The airport is to double its snow vehicle fleet from 47 to 95 at a cost of £8 million, although most of these vehicles will not arrive until the new year.

Gatwick has not been immune from weather problems and has closed several times in recent weeks, but a spokeswoman said this morning: "We are as close as we can be to normal operations."

Gatwick was bought by Global Infrastructure Partners, the owners of London City airport, a year ago after the Competition Commission forced BAA to sell it because of its dominance in the south-east via its ownership of Heathrow and Stansted.

GIP paid £1.5 billion for Gatwick, promising a major investment programme, including the removal of a shopping mall to expand the security search area.

(8) EU warns the City: We want to know who is short-selling what

EU markets chief Barnier warns the City casino days are over

The deceptively quiet Phoney War between Brussels and Anglo-Saxon finance is coming to an end. Life is about to change for hedge funds, commodity traders, and the 'prop desks' of global banks in the City of London.

By Ambrose Evans-Pritchard in Como
Published: 11:45PM BST 09 Sep 2010

"We want to know who is doing what with short-selling," said Michel Barnier, the European single market commissioner and the Frenchman in charge of the EU's new machinery of regulation.

"We need markets, and we need financial institutions that create value-added, but everyone has to be able to answer for what they are doing. People taking crazy risks linked to crazy rewards have to be brought back to their senses," he said, in a wide-ranging interview with The Daily Telegraph at the annual Ambrosetti conference on the shores of Lake Como.

Mr Barnier said the new European Single Market Authority (ESMA) endorsed in principle last week - along with EU banking and insurance watchdogs - will have sweeping powers to control derivatives.

"The EU authorities are going to look at every product. ESMA can restrict leverage, or in exceptional circumstances even ban a product altogether," he said. The Commission is introducing a text on derivatives next week as part of a new oversight machinery covering the gamut of finance and investment, including controls on private equity, hedge funds, as well as oil and currency trading.

Mr Barnier said there was no plan for a blanket ban on the short-selling of stocks or on the use of derivatives such as credit default swaps (CDS), famously exploited by funds to short Greek, Irish, Portuguese, Spanish bonds during Europe's debt crisis this year.

"It is not a question of prohibiting. Short-selling is useful, if used well, but we want to avoid abusive naked short-selling, and be able to take action in emergencies," he said.

Naked short selling is where funds bet against assets they do not own without first borrowing the underlying security, sometimes in an attempt to destroy a company. The distinction is often blurred in real life. Investors use a range of derivative short instruments as a way to hedge other assets that are illiquid

Mr Barnier laughs off talk of a Brussels plot to shut down the City of London, the putative ambition of Louis XIV, Napoleon and the French elites for three centuries.

"The City is the foremost financial centre of Europe, and a pillar of our force, and I want it to continue to be so. As French citizen I voted for the UK to be admitted to Europe. But it is in City's own interest that it should be well regulated, by that I mean 'smart regulation'," he said, adding charitably that London was a victim of a US-made crisis than a major contributor to the global banking debacle.

"I have been very careful in our negotiations on financial supervision to reach a successful deal with the British. It is a priority that we work together, the British must be on board. We are well aware of George Osborne's red lines," he said, referring to a safeguard clause that any EU decision must not infringe on fiscal sovereignty. "I have found the new government pragmatic and competent, and Vince Cable is a sage."

The promise not to run roughshod over Britain's biggest industry is undoubtedly sincere. Although Mr Barnier is a former French foreign minister and farm minister, he is a lifelong believer in the European ideal. He comes from the mould of Robert Schuman, the French statesman who offered the historic olive branch to a defeated Germany in 1950.

Mr Barnier - a Savoyard - is viewed with suspicion by hardliners in Paris as a man too willing to please Perfide Albion. His right-hand man as director-general is Jonathan Faull, a British official with free-market views.

Yet the problem for Britain is that ultimate control over the City is passing from Westminster to Brussels in perpetuity, while commissioners come and go. ...

Mr Barnier's most fervent regulatory wrath is reserved for those who break the ancient taboo of speculating on food products. "I find that scandalous. I think we as Europeans ought to pay a lot more attention to what is happening in the rest of the world, above all Africa," he said.

He said there was evidence that speculators had played a role in pushing up the cost of oil and food during the price spike in 2008, when hunger riots broke out in a string of poor food-importing countries across the world. ...

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