The Eurocrats finally seem to have realized time is running out. The abrupt market downdraft of last week appears to have focused their minds on the need for a much larger scale rescue mechanism of some form, with numbers like trillions attached, and that will move the Eurozone further towards fiscal integration, another badly needed outcome.
Your truly, along with a lot of the English language press, seems to have misread the resignation of Jurgen Stark from the ECB as a Bundesbankian repudiation of sorts. Instead, it’s a sign that Germany realizes its interests lie in preserving the Eurozone. Per Marshall Auerback:
Most of the ‘blame the Mediterranean profligates rhetoric we’ve been hearing has been diversionary, to draw local attention away from the fact that Germany’s hardcore Bundesbankers are losing this battle. .
The pan-Europeanists are the ones who will support a coordinated response to financial issues, not coincidentally because this will be the only way to retain existing benefit levels once some sovereigns and the banks exposed to them go soft.
Stark’s replacement, Asmussen, is an SPD guy and even though he makes all of the same hawkish noises, he’s not as hard-line as Stark.
Remarks from Angela Merkel over the weekend confirm that the Germans understand full well that they can’t afford a Greek exit:
Merkel rejected Greece leaving the euro area, saying that “we can’t force it, but I don’t believe in that in any case” because it would send a signal to financial markets that attacks on euro-area sovereigns can succeed.
“Maybe Greece leaves, the next country leaves and then the next country after that,” she said. “They would speculate against all the countries.” A small group of euro countries would be left at the end, deprived of the euro’s advantage as the currency appreciates, she said.
Thus Germany is going to pass its version of the TARP on Thursday, which is legislative approval of increased powers of the EFSF, which looks like a sovereign bailout device but is really a “save the French and German banks” vehicle.
The problem is now that the European elite finally realizes it needs to Do Something Big, Fast, political timelines look way out of synch with market demands. As Wolfgang Munchau notes:
The debate has focused entirely on what cannot be done rather than what can – no eurozone bond, no monetisation, no bail-out, no break-up, no this, no that. As the world is discussing the next crisis resolution steps, the European authorities are still struggling with the implementation of the ratification of the rather minor changes to the EFSF agreed by the European Council on July 21, or the perverse debate about Finland’s request for collateral. European policy has been constantly lagging behind.
This will continue. On Thursday, the Bundestag will vote on the EFSF. In October, it will vote on the next loan tranche for Greece. In the new year, it will vote on the European stability mechanism, the successor to the EFSF. By then it may have to vote on a third Greek programme, as the second, not yet ratified, programme is already way out of date. There may be second programmes for Portugal and Ireland as well. Each, of course, will require a separate vote in the Bundestag.
Berlin, however, is not the only source of uncertainty. Parliamentary majorities are melting in Helsinki, The Hague, Bratislava – and Athens. Do we really believe the Greek government can implement one austerity plan after another with a majority of five seats?
So even if Europe’s leaders were to come together tomorrow and agree on all the necessary steps to end the crisis, they would not have solved it until they could demonstrate that they enjoyed full political support. That is unlikely to be the case for a while yet.
And this presupposes they can agree on what to do. The supposed experts, the banksters, are in disarray as to remedies. From Bloomberg:
Wall Street leaders, urging coordinated action from world governments to solve the European sovereign-debt crisis, struggled themselves during four days of meetings in Washington to agree on what’s needed to end it.
The chiefs of firms including JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Deutsche Bank AG (DBK) and Societe Generale (GLE) SA met for three hours at the National Archives on Sept. 23. They differed on which government and private solutions may restore confidence in European debt and banks, and on some elements of regulation
In one sense, this result isn’t surprising. In fact, it’s bizarre to have US CEOs, who aren’t all that expert in a lot of the issues, try to come up with a solution (normally, you have staffers work to define issues and possible solutions, and have the CEO meetings ideally be ceremonial, or if necessary, to try to make headway on contested issue.
Their anxiety and desire to, um, help, is no doubt due to the number of shoes that might drop in the near future. From the New York Times:
“The next three weeks are absolutely critical, and they can still stabilize the markets, but I wouldn’t tell my clients to put money to work until we see it,” said Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management. “As we stand right now, European policy makers have gotten well behind the curve. It’s not about the periphery anymore; it’s about the core, too.”
A fresh indicator of market confidence in European borrowers will come as Italy sells billions of euros in bonds this week, culminating on Thursday. Weak demand at an auction on Sept. 13 brough global worries about the safety of Italian debt, which stands at a whopping $2.3 trillion, making Italy one of the world’s largest borrowers.
What is more, Italy’s debt load equals 120 percent of the country’s gross domestic product. In Europe, only Greece is in worse shape, with debt totaling roughly 150 percent of G.D.P.
In addition, the Greek Parliament must vote this week on a recently proposed property tax increase that is seen as a test of whether the country will stick to past promises to tighten its belt.
Greece is also trying to show its austerity program is enough to qualify for an aid payment due in October.
And if that isn’t nervous making enough, past agreements may come unglued. Again from the Times:
Under a deal worked out in July, European banks agreed to take a 21 percent loss on their holdings of Greek debt as part of a restructuring that would give Greece more time to pay back what it owes, but now it appears political leaders in Germany and elsewhere want the banks to take a bigger hit.
Wolfgang Schäuble, Germany’s finance minister, suggested as much in a tough speech delivered to international bankers at the Institute for International Finance over the weekend. He argued that because of their bad lending decisions, bankers shared the blame for Greece’s predicament and should also share in the cost.
“Without a substantial contribution from financial institutions,” he said, “the legitimacy of our westernized capitalized systems will suffer.”
But Josef Ackermann, chief executive of Deutsche Bank and the chairman of the Institute for International Finance, quickly rejected any effort to renegotiate what had been agreed to in July. “It is not feasible to reopen the agreement,” he said.
No wonder the big banks are freaked out. These rescues, after all, are really to save their hides.
And if that isn’t discouraging enough, Paul Krugman reminds us that even if the Eurozone officialdom manages to cobble together a big enough rescue vehicle and get it passed, this is still just a bigger, better, kick the can down the road strategy that in the end will fail. These maneuvers fail to address the underlying problem of German’s high level of exports within the Eurozone, and reliance on austerity rather than growth strategies (and writedowns) to help reduce debt level in periphery countries:
Think of it this way: private demand in the debtor countries has plunged with the end of the debt-financed boom. Meanwhile, public-sector spending is also being sharply reduced by austerity programs. So where are jobs and growth supposed to come from? The answer has to be exports, mainly to other European countries.
But exports can’t boom if creditor countries are also implementing austerity policies, quite possibly pushing Europe as a whole back into recession.
Also, the debtor nations need to cut prices and costs relative to creditor countries like Germany, which wouldn’t be too hard if Germany had 3 or 4 percent inflation, allowing the debtors to gain ground simply by having low or zero inflation. But the European Central Bank has a deflationary bias — it made a terrible mistake by raising interest rates in 2008 just as the financial crisis was gathering strength, and showed that it has learned nothing by repeating that mistake this year.
As a result, the market now expects very low inflation in Germany — around 1 percent over the next five years — which implies significant deflation in the debtor nations. This will both deepen their slumps and increase the real burden of their debts, more or less ensuring that all rescue efforts will fail.
And I see no sign at all that European policy elites are ready to rethink their hard-money-and-austerity dogma.
This is all looking hopelessly ugly. I keep trying to remind myself this would make for great theater if we all didn’t have a stake in the outcome. But that line of thinking does not provide as much solace as it should.