EU Ready to Present Stimulus Package

On Wednesday the European Commission will present a giant stimulus package to meet the looming economic downturn -- with an estimated €130 billion in initiatives. But Brussels has neither the money nor the ability to forge an economic program.

By Hans-Jürgen Schlamp in Brussels

The situation is getting serious. Europe's industries are running out of contracts. Economists predict that next year will bring reduced working hours and layoffs and that times will get bleak. The US Federal Reserve and Treasury Department on Tuesday announced a new package totalling $800 billion to make it easier for small businesses, students and home buyers to borrow money. And in Europe, state economic stabilization policies that fell out of favor long ago have suddenly found many new backers.

On the European Commission, where European President José Manuel Barrosa and 26 other commissioners direct the business of the European Union and where "the market" has been viewed as the best force to steer the economy for a long time, "the state" was supposed to keep its fingers out of everything. Now it's all different.

The states -- or, more precisely, their taxpayers -- have just been forced to rescue the global banking system because its leaders proved to be little more than incompetent gamblers. Now more tax revenues are supposed to avert -- or cushion -- a threatening crisis in the global economy. Taking their places at the head of this phalanx in the fight of "politics against recession" are Barroso and his commissioners. They plan to bring forward an enormous economic program on Wednesday full of prescription for battling the crisis.

"Temporary cuts in value-added (or sales) tax" is one of the proposals that could be "quickly implemented to give a strong fiscal impulse to promote consumption," reads one of the proposals. Additional caps should also be placed on the value-added taxes for certain labor-intensive services, like those performed by tradesmen, cooks or waiters. The Commission also intends to give tax concessions to especially climate-friendly products and to lower income taxes on low-income earners.

But that's still not enough. The Commission will also call on EU member states -- especially those that are not deep in debt -- to use national spending packages to "quickly stimulate demand and to lift consumer confidence." According to the plan, the European Central Bank (ECB) should lower interest rates even further and the European Investment Bank (EIB) should offer cheap credit for measures meant to conserve energy and for the production of climate-friendly automobiles. In all, Brussels wants a package worth 1 percent of Europe's economic output -- the equivalent of roughly €130 billion.

The problem, though, is that Brussels has neither the money nor the ability to shape a European economic program. Money and ability lie with the member states themselves, and -- as usual -- they can't agree on a strategy. Every government does as it sees fit. Brussels' super crisis-rescue package is not just a package of well-meaning yet unbinding suggestions; it's also the simple sum of previously announced national measures. Barroso, nevertheless, can distribute research subsidies or infrastructure aid within the EU's budget faster than previously thought. But he has no other means, and won't be given any. Elmar Brok, a German member of the European Parliament, has unsurprisingly spoke of "false labeling" in Brussels.

Barroso says the package is based on a "groundwork of coordinated measures by member states, which are tailored to each specific situation." The head of the EU's largest economy, Chancellor Angela Merkel, liked the sound of that and proceeded to do just what Germany's "specific situation" required. Her government has approved injections of capital which over the next two years will total €32 billion. She refuses to do more, and she's said nothing about a quick reduction in taxes.

French President Nicolas Sarkozy could not talk her out of this strategy on Monday in Paris. The British example doesn't interest her, either. Prime Minister Gordon Brown's government wants to lower its value-added tax (or VAT) for 13 months, from 17.5 to 15 percent, starting in December, and demand even lower rates in some instances, such as restaurant bills. To balance these cuts the government wants to raise income tax at very top of the scale, and skim more from sales of alcohol, tobacco and gasoline.

All European governments are currently facing the same task of building crisis packages. Most choose from a menu that includes public works expenditures, tax cuts, monetary handouts, benefits for the poor or for families with children -- the kinds of things that can be pushed through quickly. more

German Auto Industry Facing the Abyss

More than 1.5 million workers in Germany depend on the automobile industry for their jobs. But that industry is now facing one of its worst crises ever. Respected giants BMW and Mercedes are particularly exposed as sales plummet.

By Dietmar Hawranek

It was time for Martin Winterkorn to relax. The exhausted chairman of the VW Group was sitting in a leather seat on the company jet, coming from a conference in Berlin where he warned attendees of the consequences of the financial crisis. It had been a long day. It was 9 p.m. and he was still in the air.

"We have never before seen this kind of a crisis," Winterkorn, 61, said at the conference. The German auto industry, he told his audience, must prepare itself for a "tough, prolonged dry spell." It would not be possible to avoid "difficult cuts" and "painful" measures, Winterkorn said.

Even after the conference, sitting in the company jet, the head of VW was still preoccupied with the question: "How bad is it really?" Winterkorn has been in the industry for decades, and he has weathered many a crisis. But now he too is baffled. "I don't know what else is going to happen," he said.

According to Dieter Zetsche, the CEO of Daimler, there are those in the industry who believe that "up to 100,000 jobs will be lost in the German auto industry in the next 10 years." Some, says Zetsche, are even suggesting that this is "the worst crisis since World War II."

The Daimler CEO has already concluded that Mercedes-Benz will produce more than 150,000 fewer cars than planned in 2009. Management is negotiating with labor representatives over the possibility of Mercedes reducing the workweek to 30 hours, with a corresponding wage cut for workers, or introducing part-time work at the company. Daimler may have to cut several thousand jobs. How many? Zetsche, 55, is not even willing to venture a guess.

Sharp Decline in Sales

Norbert Reithofer, the 52-year-old chief executive of BMW, is similarly baffled. He believes the company is "in the biggest crisis in its history." BMW has already cut more than 8,000 jobs this year. Production in its plants is shut down for several weeks at a time, a step that Volkswagen and Mercedes-Benz have also taken. But this will not be enough to offset the sharp decline in sales. In some markets, auto sales have not dropped by this much since the 1973 oil crisis.

In October, car sales dropped by 32 percent in the United States and close to 15 percent in Europe. Sales are also down in former growth markets India and Brazil, while economic growth in China is weakening.

This crisis is different from the ones before it. Opel is fighting for its survival, because its parent company, General Motors, is on the brink of bankruptcy. Mismanagement at Ford and Chrysler has driven the two companies into similarly dire straits. This was predictable.

But now even VW, Mercedes-Benz and BMW are at risk, companies that were considered the most stabile in their industry. Even executives at Japanese carmaker Toyota are worried. According to Executive Vice President Mitsuo Kinoshita, "the current situation is an emergency, of a magnitude we have never seen before."

There is reason for this massive, general uncertainty: The auto industry is being assaulted on several fronts.

Sales are declining rapidly worldwide. If there is one thing anxious consumers can postpone, it is the purchase of a car. Economic crises normally affect one major market, which allows large car companies to make up for the difference in other countries. But this time the financial crisis is shaking North America, Asia and Europe at the same time.

Suppliers are likewise threatened. Banks have cut off funding for necessary investments. Some suppliers are already on the verge of bankruptcy. If the biggest manufacturer of rear-view mirrors or door locks fails, carmakers will be forced to stop production, and it will be difficult to quickly find replacements.

Tens of Thousands of Jobs at Risk

Providing consumers with financing is also becoming more difficult. Part of the reason VW, Audi, Mercedes-Benz, BMW and Porsche have enjoyed such phenomenal sales growth in recent years is that they have offered customers attractive leasing and financing packages. Now the carmakers' lending divisions must pay high interest rates to obtain the necessary funds on the capital markets, if they can borrow at all. As a result, they can no longer attract customers with low-interest car loans. more

Detroit: Wait until after next year

Congress wants the Big Three to produce a plan for profitability before it will approve a bailout. This could be within reach...but not until 2010.

By Chris Isidore, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- A profitable U.S. auto industry just around the corner? Given the crisis hitting the industry, it sounds about as realistic as flying cars.

Congressional leaders are demanding to see details by Dec. 2 about how U.S. automakers will start making money again before they'll agree to even have a vote on the $25 billion federal loan package the industry is seeking.

Many critics of the bailout suggest that automakers have shown no indication of how they'll return to profitability. Some argue the Big Three U.S. automakers are doomed to fail even if they get loans from the government.

But General Motors, Ford Motor and Chrysler have already made sizable cuts in production and staffing throughout the year. Additional cuts will come in the next few months, and some as soon as later this week.

While it's tough to offer guarantees of profitability with so much uncertainty about the economy, if the automakers get the federal help they are asking for, the Big Three could be back in the black as soon as 2010.

With that in mind, here's what GM, Ford and Chrysler are likely to point out in their business plan to Congress.
Lower employment costs

GM (GM, Fortune 500), Ford (F, Fortune 500) and Chrysler have been downsizing for years and have all continued to make even deeper cuts this year which will save them billions of dollars.

GM plans to cut more than 7,000 salaried and contract employees this year as it aims to trim nonunion labor costs by 30%, or about $2 billion annually.

Those departures did not begin until this quarter and most of the remaining employees should leave by the end of the year. So some of the savings won't take effect until next year. And the cost of the severance and retirement packages is causing steeper losses in this year.

Ford and Chrysler plan similar size cuts in their non-union staff. Chrysler plans to identify by Wednesday 5,000 salaried and contract staff who will leave the company, about 25% of that remaining workforce.more

Japan keeps interest rates at 0.3%

The Bank of Japan’s Monetary Policy Meeting last Friday has yielded a unanimous vote to retain its present interest rate at 0.3%.

The central bank has stated that economic activity remains stilted due to the continuing effects of energy and materials rising in price earlier in the year coupled with a decline in export activity.

CPI (minus fresh food) is at 2.5%, and is likely to be moderated by less volatile food prices and the falling cost of petrol and related products.

The Japanese economy is forecast to return to the path of sustainable growth in the long-term, but the Bank of Japan has stated that the immediate economic future is more difficult to predict and more comfortable economic conditions may take some time to arrive.

The central bank has pledged to continue careful monitoring of the global situation, with a view to utilising monetary policy effectively to ensure Japanese economic stability. more

Fitch downgrades seven UK building societies

Fitch has downgraded the credit ratings of seven UK building societies.

Britannia, Chelsea, Newcastle, Principality, Skipton, West Bromwich and Yorkshire have all been downgraded, reflecting the credit rating agency’s assessment of their exposures to specialist mortgages, such as sub-prime and buy-to-let, and high loan to value (LTV) ratios.

The move also takes account of the mutuals’ involvement in the commercial mortgage sector and their recent growth patterns in lending.

The decision acknowledges the worsening outlook for the UK economy, which Fitch expects to result in larger impairment charges for all UK building societies, as unemployment rises and house prices decline.

With regard to Britannia, which is the UK’s second-largest building society and was last month reported to be interested in a merger with Co-operative Financial Services, Fitch has doubts about its Platform lending arm, which once specialised in high LTVs. more

Financial News

Nov. 21 (Bloomberg) -- The following companies may have unusual price changes in U.S. trading on Nov. 23. Stock symbols are in parentheses.

Standard & Poor’s 500 Index futures expiring in December rose 43.70, or 5.8 percent, to 792. Dow Jones Industrial Average futures climbed 549, or 7.3 percent, to 8,036. Nasdaq-100 Index futures added 16.75, or 1.6 percent, to 1,056.25.

Cooper Industries Ltd. (CBE:US): The maker of Crescent wrenches said fourth-quarter profit will be lower than the previous forecast range of 83 cents to 92 cents a share, citing “deteriorating business conditions” from the “unprecedented credit crisis.” The stock rose 5.8 percent to $24.13 in regular trading.

Eli Lilly & Co. (LLY:US): The pharmaceutical company lost a bid at Ontario’s highest court to limit potential damages in a lawsuit filed by patients who claimed they developed diabetes after using Lilly’s Zyprexa schizophrenia drug. The stock rose 1.7 percent to $30.43 in regular trading.

Foot Locker Inc. (FL:US): The owner of the shoe store chain had its debt rating cut to BB- from BB by Standard & Poor’s, which said a further downgrade may be possible. The stock tumbled 28 percent to $5.49 in regular trading. more