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European Union leaders including European Council president, Herman Van Rompuy, European Commission president, Jose Manuel Barroso, ECB president Mario Draghi, and Eurogroup finance ministers head, Jean-Claude Juncker, draw up a 10 year road map for "a genuine economic and monetary union." The prime ministers of Italy, France and Spain push jointly for deposit insurance to cover European bank deposits, Europe wide banking supervision, and bailout funds to directly purchase sovereign debt of Italy and Spain without conditions. This takes place June 22-27, 2012, with the EU leaders increasing pressure on Germany for the first time in concerted fashion. Ms. Merkel and her coalition partners the Free Democrats see this as an effort at mutualizing debt. Merkel says Europe will not have total sharing of debt "as long as I live," in her talks with Free Democrats.

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Denning uses the Brazilian government's scrapping of a 6% tax on foreign purchases of bonds to slow the slide in the value of the Brazilian currency, the Real, to point to the changed situation today for Brazil, India, Turkey and S. Africa. Current account deficits in these countries are high, and foreign investors sentiment about emerging markets may be affected by the street protests in Turkey, reducing inflows of capital. The mining worker protests in S. Africa and the street protests in Turkey, have led to a decline in the currencies of the two countries. The Fed's quantitative easing program may be coming to a close, which would reduce the flows of capital to emerging market countries. Turkey has seen a boom in domestic credit supported partly by foreign capital inflows. The current account deficit to GDP ratio for Turkey is expected to be 7.28% in 2013, for S. Africa 6.46%, and Brazil 3.25%, according to IMF forecast.

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This letter in the WSJ praises Chancellor Angela Merkel for her sense of decency and humanitarian sensibility. It asks what else could she have done in the refugee crisis. It says Merkel's "we can do it," is also the same spirit Germany showed for successful reunification of the country.

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Failure by EU leaders to take early and decisive action to reduce Greece's debt to sustainable levels in 2009. This was when the IMF report by Dutchman Bob Traa blew the cover off the Greek coverup of deteriorated finances. Policy missteps included ECB president Trichet and other EU leaders pushing austerity measures and not taking needed tough action on reducing the debt. By November 2011 a 50% reduction in debt with bondholders taking the losses is not enough to correct the situation. Greece's debt is discounted by 70% by Nov 2011. Analysts estimate an 85% reduction in Greek debt being necessary for Greece to pull through without a default.

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France and Germany remained far apart on approach to banking regulation in Dec. 2012. Germany does not support regulatory powers of the ECB over Germany's small and midsized savings banks which lend to small businesses and consumers. France supports regulation of all 6000 banks in the eurozone by the ECB. Germany also raises concerns about how the regulatory powers of the ECB can affect its powers in setting interest rates. Germany does not support the British position for regulatory powers over London based banks to remain in Britain. Coming up with a new banking supervisor for European banks with regulatory powers of supervision is needed for Spain to get access to additional EU financing. This is also part of the new financial architecture for the eurozone, including deposit guarantees, which needs to be set up.

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Some manufacturing towns have done worse than others during this period of a surge in Chinese imports. Dunn, North Carolina is one of these towns. It is 40 miles south of Raleigh. In the 10 counties clustered around Raleigh factory employment declined by 40% between 1990 and 2007. Per capita cost of government payments for benefits such as unemployment insurance, food stamps, increased by 74%. Cleveland by contrast was relatively insulated and adapted to the imports by moving into areas of manufacturing that required more technology and complexity. Autor and Hanson studied 722 county clusters throughout the U.S. to discern the impact of the surge in imports and free trade.

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At one point the ruble reaches 80 to the dollar on Dec. 17, 2014, before settling at 60. It has lost more than half its value. The architect of Russia's finances in Putin's first and second terms, Alexei Kudrin, is critical of the way the central bank and the Putin administration is handling the economy and Russia's finances.

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After intense efforts German Chancellor Merkel was able to pass legislation expanding the EU bailout fund with the support of members of her coalition in Parliament. The opposition Social Democrats and Greens supported the legislation. Merkel carried the vote with a 4 vote margin from her CDU-FDP coalition. Fifteen members of her coalition voted against the legislation. This increases the bailout fund's lending capacity from around 250 billion euros to 440 billion euros. There is considerable skepticism among members of the German parliament about whether this will work. German guarantees for the European Financial Stability Facility (EFSF) increase to 211 billion euros from 123 billion euros under the new legislation. German finance minister Schauble ruled out borrowing by the EFSF from the ECB and leveraging EFSF funds in the process. The fear for German policymakers is that this would lead to Germany losing its triple-A credit rating and create its own risks. Experts have cautioned against the use of leveraging because of the financial risks....

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Higher inflation in Germany could help rebalance the German economy by increasing imports. German inflation has averaged 1.6% since 1999, compared to 2.0 % for the eurozone. It was 2.3% in December. And after years of wage restraint German unions are increasing the wage demands. IG Metall is looking for a 6.5% wage increase. And interest rates at 1% are quite low for Germany where unemployment is down to 5.5%, according to Eurostat, and employers have to meet higher wage demands. The ECB is aiming at 2% inflation and Germany has a 26% weighting in the calculation of the rate. But as Italy, France and Spain see inflation decline there is room for addditional inflation in Germany before the eurozone goes well above the 2% inflation rate. By freezing wages and improving price competitiveness with German products, other countries could increase exports. Yet the prospects of this making a large difference is limited because German companies are likely to push for wage restraint. The Bundesbank predicts wage increases of 2.4% in 2012. Over time the wage restraint in other eurozone countries and even slightly higher wages in Germany would reverse the trend since 1999 of Germany having much lower inflation, and this could be one of the factors helping in rebalancing....

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Concern about slowing growth in China with rising inflation. The problem of opaqueness of the financial system and of banks that are both listed companies and run by the government, and how this could accelerate a slowdown at some point with accumulated problems in the financial system. A sense that China's growth model has reached a limit, and whether there will be a soft landing.

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Austin Goolsbee says the overvalued currencies of Italy, Greece, Spain and Portugal and the lack of growth under austerity plans proposed for these countries create impossible odds for resolution of the financial problems in these countries. The German position is that profligate spending and irresponsible accounting in Greece, and structural issues in Italy ranging from entitlement spending to tax evasion, need to be resolved.

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A shift in priorities away from focussing on high growth to lower sustainable growth was announced by China's premier Wen Jiabao at the National People's Congress, China's parliament, in March 2012. This shift will reduce investment in infrastructure, power generation and exports, which will affect the level of imports of commodities from commodity producing nations in the Middle East, Australia, Canada and Brazil. It should increase imports of software, computers, entertainment, tourism and high tech goods from the U.S. and Europe. Chinese leaders have said they would make this kind of shift for some years now but growth has consistently increased more than the target rate, and domestic consumption as a percentage of the economy has actually decreased in the last decade. Now 9-10% growth rates may be a thing of the past and the target of 7.5% set this year may be actually closer to the real figure. The Chinese leaders have belatedly realized the need to make these changes now because slowing markets in Europe -which is seeing declining growth and high unemployment- and in the U.S., make the issue impossible to avoid. Wen told the Congress: "Accelerating the transformation of the pattern of economc development... is both a long term task and our most pressing task at present... Domestically it has become more urgent but also more difficult... to alleviate the problem of unbalanced, uncoordinated and unsustainable development." This is his way of saying that its unavoidable and better to start in earnest now, and at the same time recognizing the resistance to change from the stateowned companies and the other interests who have benefitted from surging growth, and now occupy a central role in the power structure. An opinion article in the People's Daily, China's official newspaper, said: "imperfect reforms are to be preferred to a crisis caused by no reforms." The World Bank's president Zoellick is respected by the Chinese leaders. He also urged them to make changes now. The recent report of the DRC, China's planning research arm, and the World Bank, also laid out the new direction away from a focus on infrastructure to domestic consumption. The fear is sudden deceleration in the absence of policy action. The impact of this will be negative for commodities over time, leading to slower growth in Australia, Brazil, and Canada. It should boost imports from Europe and the U.S. of high tech, consumer, pharmaceutical goods over time....

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Landon Thomas looks at the European Financial Stability Facility, the organization that was formed in May 2010 to be the mechanism for raising and channeling funds to troubled eurozone economies Ireland, Greece and Portugal. He describes its evolution, its new responsibilities under the July 2011 eurozone agreement, and the difficulties it might face. The credibility of the EFSF is critical to the solution being worked out by eurozone leaders. The EFSF is based in Luxembourg and is headed by Klaus Regling, a German economist and a top official in the European Commisson's financial division. The EFSF raises funds in the financial markets. With Germany as the largest backer the EFSF is able to raise funds at low interest rates such as 3.3% for 10 years at one recent offering. The fund has a triple-A rating. In June and July the stability fund raised 8 billion euros in two auctions. It plans to come to the market four times during the rest of 2011 for funds to support Ireland and Portugal. The EFSF will need new powers and structure to meet its new role as the principal mechanism for solving the crisis. It is now given the role of the buyer of last resort for the bonds of troubled eurozone economies. This means national parliaments in the eurozone will have to approve these new powers and resources. One concern in financial markets is how the EFSF would deal with the needs of Italy or Spain if one of the two economies runs into trouble. Italy and Spain consitute 30% of the EFSF's backing, if they were to run into problems, would the burden fall disproportionately on France and Germany? And because France may have public finance problems of its own with declining competitiveness, does this mean Germany would be the real backer in that situation....

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With Britain not willing to join an EU wide agreement for all 27 countries in the region, Sweden and the Czech Republic asking for time to consult its parliament, and Hungary declining, only 23 EU countries are now on board for new EU wide treaty changes for fiscal discipline. This makes new EU treaty changes unlikely, and means France and Germany will move ahead with a eurozone agreement for the 17 nation group. This can be done much faster than the cumbersome process for EU treaty revisions. The details of the new agreement will be worked out in the coming weeks and should restore confidence in financial markets. The problem now most experts say is that a new agreement might move too quickly to reduce deficits, worsening the economic prospects in the European Union countries. Fernando Fernandez, an economist at IE Business School in Madrid, says the critical question is how much time countries will be given to meet new rules. If for instance debt is to be reduced by 20 percentage points of GDP in 3 years under new rules, this would impact eurozone growth severely with sharp contractions in already fragile economies. Peter Morici, business professor at the University of Maryland, underscores this, saying Germany is close to zero growth and economies of countries like Spain, Portugal and Italy are contracting. Higher unemployment will result with smaller tax bases, making the situation appear to improve as borrowing rates for Italy drop now, but worsening the situation in 2012-2013 as deficit projections are not attainable. This is already true in Britain where earlier deficit projections are being pushed into future years as economic growth is declining....

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Simon Nixon says British prime minister, Cameron, has antagonized European leaders by making demands to protect Britain's financial industry. Ironically this happens as Britain was arguing for stricter financial regulation. Britain has been isolated and risks remaining on the sidelines from now on. Nixon says this starts a process that could lead to Britain withdrawing from the European Union.

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Anne Applebaum describes comments of European diplomats she talked to who were strongly critical of British prime minister Cameron's efforts to win special protections for London's financial district, the City. They described this as petty, especially when the European negotiators were working to save the Euro currency. Sarkozy said recently that the British hate the euro, and have done little to help, and should shut up. And that is the sense today in European capitals even as Conservatives in Britain applaud Cameron's move. The result is to isolate Britain from the rest of Europe, even as Britain will be put in a position to having to play by rules set by the other 26 countries in the European Union, who are its main trading partner.

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For the Jan. to Nov. 2011 period Japan shows a trade deficit of 2.3 trillion yen. Analysts expect a trade deficit for the full year- the first since 1980 and setting a new trend as long as the yen stays at a high level. The yen is at 77 yen to the dollar in Jan 2012. Japan still maintains a current account surplus because of returns from investments overseas. The Bank of Japan reports that the economy is expected to contract by 0.4% for the current fiscal year.

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The dollar has reached the mark of 86 yen by the begining of August 2010. Japanese analysts see the dollar at 90-100 yen as reasonable for Japan's export based companies. One factor causing this is the Chinese government increasing its holding of Japanese government bonds. By May 2010 China had accumulated 1.27 trillion yen according to the Japanese government. This rise of the yen will have a negative effect on Japanese exporting companies.