Quote of the Day:
What is needed is a tenable, medium-term solution to the euro-area crisis, which is affecting financial markets and real economic output beyond its borders.
Paton Odom, Dallas Fed report global economic growth, June 27th 2012.
Europe Is Everybody’s Problem
- Great little program by The BBC’s Newsnight – worth a watch for everyone whether European, Asian, American… and it sets the tone for today’s comment. I’d watch it as soon as you can as, no doubt, it’ll soon get pulled from YouTube.
- Europe is everybody’s problem. For those who think that Europe is a place too far away to affect them, I highlight a couple of excerpts today from the Dallas Fed report on growth momentum in the World economy:
Global gross domestic product (GDP) growth forecasts have moderated in the second quarter, with industrial production and purchasing manager indexes reflecting restrained activity in advanced and emerging economies. Uncertainty regarding near-term stability of the euro area, which appears to be in recession, remains the most important determinant of expansion. While large emerging economies such as Brazil, Russia, India and China have led growth following the global financial crisis, their expansion has cooled to reflect slowing trade activity with advanced-economy partners as well as internal adjustments. Inflationary pressures and commodity prices have moderated.
Reflecting On Merkel’s “Defeat”
- In my “one week to save the Euro” comment a week ago I said.
- That said, with Merkel’s current line going down exceptionally well with the German electorate, I’m skeptical as to how this U-turn can be engineered without:
a) incurring more dept on sovereign balance sheets with highly stringent conditions to the effective creditors (i.e.Germany) causing wider political and social split within the Eurozone
b) significantly subordinating existing debt holders in Europe–causing wider financial and economic split in the market place. It would be a dangerous game to turn the entire European bond market into a retrospective CDO market. The ECB tried it in Greece, remember – the bond market got very squeamish.
- Then, suddenly, out of the blue come Europe’s “begging men” (Monti, Hollande and Rajoy) announcing that they have indeed found a perfect “solution” which involves directly bailing out the Spanish banks without the Spanish government incurring more debt while simultaneously protecting the seniority of existing investors in the Eurozone bond markets! I could go into detail here but there is little point, that was essentially the crux of it – or at least the most important part. For those of us following Euro-politics closely, it was indeed a WOW moment…
- It appeared Merkel had buckled under the pressure from her Southern Counterparts and was seen as the big loser in the Eurozone showdown. Global indices were off to the races on Friday. A rapid transformation for The Iron Lady of Europe, who had been dubbed as “Frau Nein” in the Eurozone media, was now suddenly crowned “Countess Capitulate” (by me)!!
- This is politics in Europe at its most exciting (believe it or not). But there were mutterings that Merkel, like her national soccer team, had been simply blindsided, or blackmailed (“erpressen” as popular German Magazine, Der Spiegel, put it – Google, rather more kindly translates the verb erpressen as “to extort”) by the shrewd and powerful men from Southern Europe. It almost seems that Monti and Rajoy simultaneously threw their teddies out of the pram in a kind of pre-empted, orchestrated tantrum. They threatened to simply “block everything” if she persisted on her political tact. Merkel had to yield; no German leader wants the dubious honor as the protagonist of a political and diplomatic collapse in the Eurozone – that’s a burden the German public understand all too well. I remember Michael Lewis’ great article, It’s The Economy Dummkopt, (another MUST read) where he says:
The streets of Berlin can feel like an elaborate shrine to German guilt. It’s as if the Germans have been required to accept that they will always play the villain. Hardly anyone still alive is responsible for what happened: now everyone is. But when everyone is guilty, no one is.
- Meanwhile, back in Germany Merkel came back to a barrage of public anger and vilification and a stormy parliament session, as the Telegraph points out in their article, How Germany reacted to Merkel’s ‘defeat’:
Reactions back home were devastating, and there were even calls for pushing back key parliamentary votes on the permanent euro bail-out fund, known as the European Stability Mechanism (ESM), as well as Merkel’s fiscal pact scheduled for Friday evening. In fact, the vehemence of the attacks seems to have taken even Merkel’s advisers by surprise.
- Ultimately, Merkel is merely a foil for German public opinion. So what happened? Did she truly get blindsided/blackmailed/out-maneuvered, was she astutely calculative of Germany’s inherent guilt over past failures in Europe and its desire to cement harmony with its neighbours… or is something else in play?
Potential Political Revolution in Europe
- I have my doubts that Merkel has simply crumbled without a plan, for one, she has a pretty good record at reading the political landscape and at horse-trading and bartering for political power amid the chaos in Europe. With back-door meetings between the begging-men of Europe, she must have anticipated this kind of mutiny. So let’s examine exactly what may be happening in Euroland politics here.
- Firstly, let’s be clear, the Eurozone crisis has not been “solved”, what has happened is that there is potentially a solution for the Spanish banking problem (and a bit of concurrent relief for Ireland too). Let’s also be clear that nothing is set in stone … yet. So far though it looks as though the European politicians have indeed bought more time. This does not surprise me in the least, remember in only my last comment, Eurocidal Tendencies, I wrote:
- I predict that the politicians will do just enough to prevent an all-out collapse on Monday morning, perhaps even a little bounce, but not enough to reassure investors over the medium term. Then we’ll look forward to the next “summit to save the World”. With all this can-kicking I’m surprised the European politicians do not have sore feet?!
- So buying more time is all that has happened… or is it? I have to admit, this is a breakthrough in terms of a change of tactic and change of direction and a change of attitude among all Europeans of all political persuasion towards the European experiment. This is squeaky bum-time at its squeakiest. There has been a distinct change of mood here in Europe over the last week.
- I feel a bit of a political and even cultural revolution taking place on this, most diverse, most intriguing, most complicated continent of ours. For the first time ever, I feel Europeans all over are simultaneously beginning to objectively consider the true nature of their ambitions and desires towards a European political union. Do we really want to be The United States of Europe, as Axel Merk brands it, and (more importantly) are we willing to make the sacrifices required to achieve that objective?
- The answer to this question is not necessarily: “no”.
- Here in Britain, only this week, the most pro-Euro politicians were pointing to the inevitability of a Euro-referendum (something that would have been unheard of a year ago). Incidentally, good to see Britain has learnt its lesson in Europe and has opted not to run headlong into the Euro-debate guns blazing and, rather, wait and see how the political crisis inEurope resolves itself first.
- Now, even in Germany, the prospects of a Euro referendum are clearly being openly debated after German Finance Minister, Wolfgang Schauble kicked the proverbial hornets nest on the matter, last week. Zerohedge even speculate that the Merkel “defeat” was merely part of a strategic maneuver towards a German referendum.
- It’s tempting to be a little anxious about all this unrest, all this upheaval and political revolution. But, for once, it seems the politicians are having to turn to the people and resort to (heaven forbid) a democratic process to base their Euro-policies. Ultimately, even in bureaucratic Brussels, the people do seem to have the power – which would mean that, no matter what the results of the process are, it will likely have more credibility and therefore more stability both politically, economically and within the financial markets.
- Despite my skepticism about the actual substance of the latest “can-kick” by the European elite, I too am changing my attitude towards the specter of Europe and therefore my approach to the political challenge and… in this respect, for some unknown reason, I feel a twinge of optimism this rainy Sunday afternoon… not a big one… but a twinge never-the-less…