In Europe, a big finger-pointing escapade is is full swing. Those looking for scapegoats for what ails the Eurozone have found a convenient target in German Chancellor Angela Merkel for refusing to cooperate in resolving the European sovereign debt crisis. Merkel is accused of anything and everything including being “extraordinarily lazy” as well as for “taking Germany to the brink”.
Those charges were made in the EuroIntelligence article Germany is rising up against Merkel’s euroscepticism
Merkel has taken Germany to the brink – but it looks that Germany does not like what it sees. Frank-Walter Steinmeier, the leader of the opposition in the Bundestag, put his fingers on the issue. If Merkel continues to favour crisis-solution via the ECB, then the ECB ends up as a bad bank.
The Left Party’s spokeswoman said Merkel’s position did not reflect the national interest but those of the banks (a position with which we would agree. Merkel is extraordinarily lazy in the definition of what constitutes the national interest.) Quentin Peel of the Financial Times noted: “The one thing that united almost every speaker was a determination to be the most pro-European. No one sought to blame Ms Merkel for not being German enough.”
Not knowing the complete details of the Steinmeier/Steinbrück plan, I proposed in EU Agrees to Agree in 2013, Bickers Like Mad Now; Smoldering Greece, Smoldering Politics “it could conceivably work“.
However, I also stated “It would involve agreement on haircuts, debt guarantees, E-bonds, fiscal policies, and debt rescues. Good luck with that.“
The point being theory is one thing and practice is another. After reading the EuroIntelligence article I have strong doubts about the theory itself.
The one thing I am absolutely certain of is the need for haircuts on sovereign debt. However, ECB policymaker Christian Noyer (also the Governor of the Bank of France) stated “As far as I’m concerned, I exclude that there will be haircuts in the future.“
ECB president Jean-Claude Trichet warned Angela Merkel not to “unsettle bondholders“.
Piling on, Ireland’s finance minister, Brian Lenihan stated “Those who think we can unilaterally renege on senior bondholders against the wishes of the E.C.B. are living in fantasy land.”
My comment on the above was “Once Ireland’s finance minister is thrown out on his ass, we will see just who is in fantasy land regarding haircuts on bonds.“
Angela Merkel’s Big Mistake
Merkel’s big mistake was caving in to Trichet, Noyer, and others who insisted on “no haircuts”.
For that, she is now the subject of “The Big Point” with everyone jumping on her back and pointing fingers. Consider this statement from the EuroIntellihgence article:
The Left Party’s spokeswoman said Merkel’s position did not reflect the national interest but those of the banks (a position with which we would agree. Merkel is extraordinarily lazy in the definition of what constitutes the national interest.)
European Nanny State
My initial reaction was “It would seem that Merkel stood up FOR Germany and against the banks when she insisted on haircuts.”
Just to be safe, I emailed my friend “HB” who lives in Germany, asking for his thoughts. His reply was “I completely agree with your interpretation.”
He went on to comment about a reference in the EuroIntelligence article citing Der Spiegel’s online editorial “Union of the Unreconciled” calling for the coordination of all aspects of economic policy, includes taxes, wages, and pensions.
My friend “HB” commented
This is what the fools that rule the Eurocracy want – a huge centralized nanny state in which taxes are ‘harmonized’ and citizens can no longer choose between low and high tax nations.
It is the absolutely worst thing that could possibly happen. It would be better for the euro-area to break up.
EuroIntelligence cited ‘European sovereign debt kerfuffle’ in which Willem Buiter calls for a “Big Bang” Approach.
According to Buiter, the following [needs to happen]:
1. Get out their ‘big bazooka’: Expand the EFSF to €1,700bn to cover potential demands from Ireland, Greece, Portugal, Spain, Italy and Belgium.
This is the amount he estimates is enough to deter speculators and to tide countries over until the ESM commences in 2013. Which is, by the way, when Buiter thinks the sovereign defaults will probably start to occur. Gulp.
2. Initiate a coordinated process of bank restructuring in the distressed periphery.
Buiter reckons that bank recapitalisation still has a way to go, and that Europe needs to stop kidding itself that senior bondholders can go much longer without a ’short back and sides’.
But the process of bank restructuring can’t continue piecemeal as this will lead to the ‘mother of all contagions’ as bondholders dodge countries where they think haircuts are imminent.
I certainly agree with point number 2. However, point number 1 is simply wrong. How many times does it take to prove the “bazooka theory” does not work. Besides, if you are going to impose haircuts, why would you need to expand the EFSF to €1,700bn in the first place?
The proper way to deal with this mess is for bondholders to pay the full burden. Should that prove to be insufficient to recapitalize banks, then and only then should taxpayers be involved in bailouts.
Bondholders took the risks, they should pay.
Germany’s Lose-Lose Situation
Mohamed El-Erian, PIMCO’s CEO, writes Germany in a Lose-Lose Situation
Pity Germany. It goes to Thursday’s two-day European summit in Brussels in a visible lose-lose situation, and with no easy way out of a complex dilemma that pits good politics against bad economics. Its hard-fought economic gains, earned over many years through restructuring and fiscal discipline, are threatened by the crisis in peripheral eurozone economies that adopted a different policy approach. To add to the irony, these challenged countries (and indeed the zone as a whole) now look to Germany to fund one rescue package after another.
Rather than simply doubling up on a faltering liquidity approach, the time has come for Germany to lead a more holistic solution focused on addressing the periphery’s debt overhang and competitiveness problems.
Those were the opening and closing paragraphs of an interesting article. The opening paragraph was faultless. In the final paragraph, El-Erian was correct to slam the Bazooka concept of “doubling up on a faltering liquidity approach”.
Unfortunately his idea “The time has come for Germany to lead a more holistic solution focused on addressing the periphery’s debt overhang and competitiveness problems” is long on flag-waving and short on details.
In the video below El-Erian offers a more detailed look at the problems although sill without solutions. It is well worth a play.
Periphery is Slowly Contaminating the Core
El-Erian discusses how contamination migrates up and how time will make things worse because the EU did not get ahead of the crisis. In addition, he slams the idea that there can be two sets of rules for debt before and after 2013. I have made similar comments several times as well.
Here are a few of the more interesting statements El-Erian made
- “What’s happening in Europe is unambiguously deflationary. Whatever projections you had for growth in Europe, you are going to be revising them down.”
- “Don’t get sucked into peripheral exposure simply because money is being thrown at the problem. Money will not solve this issue. It’s a balance sheet issue.”
- “Be Cautious of the Euro, even German bonds because the periphery is slowly contaminating the core.”
- “The Eurozone is so heterogeneous that the bad contaminates the good.”
- “Germany, France, Netherlands, Austria are homogeneous countries that would stay in the Eurozone. Nonetheless, a monetary union has to be accompanied by a more fiscal union.”
El-Erian does not think the Euro goes away but the 16 member Eurozone group may shrink.
Germany Unfit for the Euro?
In distinct contract to El-Erian’s reasoned comments, please consider Germany is unfit for the euro by Joerg Bibow.
Sooner or later Europe may have to conclude that Germany is unfit for the euro. Let the Germans have their mark back if they are so keen. Let the new euro-mark rise to US dollars 2 or 2.50, so that the joys of stability are real. Euroland may then regroup around France. With Germany once again proving immature to provide constructive rather than destructive leadership, Europe’s fate is in France’s hands.
One thing’s certain, France would not be willing to bail out the PIGS by itself. Moreover, if Germany and France left, how long would Ireland stay enslaved to the EU? Six months?
Then you have to ask, how long would Greece, Portugal, Spain and Italy stay together singing Kumbaya?
Is Germany unfit for the Euro or is the Euro unfit for the PIIGS? Isn’t that the real question?
Such discussions are the consequences of a currency union with a one size fits all interest rate policy combined with widely varying fiscal policies, pension structures, union benefits, and other problems.
Arguably, the Euro experiment was never meant to work in the first place, at least for such a complicated heterogeneous mix.
Mike “Mish” Shedlock
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