I would imagine that some EU policymakers are not happy right now. We’ve put up links in Links from various European media outlets yesterday and today which describe the unusual lengths (by modern geopolitical standards) that Obama took to push Eurozone leaders to agree on a bailout package last weekend. Obama reportedly depicted the financial markets as a hostile force:
Dealing with the markets was like dealing with a military enemy, Mr Obama said. You had to use “overwhelming force”. He also offered help from Washington to buy up euros for dollars and ease the pressure on European central banks.
So it looks as if Paul Volcker is a turncoat. It’s one thing for people in the private sector to express negative views about the future on the Eurozone, quite another for someone of Volcker’s stature who is playing a policy role for the Administration to undermine an initiative deemed so important that the President has thrown its weight behind it. From Bloomberg:
Former Federal Reserve Chairman Paul Volcker said he’s concerned that the euro area may break up after the Greek fiscal crisis that sparked an unprecedented bailout by the region’s members.
“You have the great problem of a potential disintegration of the euro,” Volcker, 82, said in a speech in London yesterday. “The essential element of discipline in economic policy and in fiscal policy that was hoped for” has “so far not been rewarded in some countries.”
The other part of Volcker’s remarks on the Eurozone is his focus on “fiscal discipline.” To be blunt, this is a bank-oriented framing of the problem, when banks are part of the problem. Greece needs a debt restructuring (in fact, that would have been a better course of action than throwing good money after bad) and any austerity program is effectively a transfer for the populace to the lenders. Given the depth of the austerity programs demanded and the potential for backlash in other countries, having the banks write off some of the loans now is far more realistic. It is more viable from both a political and economic perspective. Fiscal cutbacks are more likely to get public cooperation if pain is shared, and are more likely to succeed if they are less severe. If other Eurozone countries go into a sharp contraction as Ireland has (nominal GDP has fallen nearly 19%), the deflationary spiral will make the debt burden even less likely to be paid off. And Spain is already showing signs of deflation, even before the serious budget cuts have begun.
I have seen no indication from any stories on the speech that Volcker acknowledged the demand problem in the EU: that more demand from German is needed from Germany to rebalance the EU internally and to buffer the deflationary pressures in the Club Med countries. Absent that, the EU is on a path to full bore deflation. Given the size of that economy, it will have serious ramifications for the stability of the global banking system and US growth.
And Mr. Market is not happy this morning. The Euro dropped through 1.25 to the dollar, an important support level, and Asian and European stock markets are down.