Frau Merkel is certainly sending some mixed messages to the world. On one hand she says she supports Greece:
After several days of market turbulence in the wake of a debate about allowing Greece to default, German Chancellor Angela Merkel has launched a counter attack, arguing that Germany remains committed to the common currency and that the euro is in Germany’s self-interest.
“Germany, as Europe’s largest economy, has the duty and responsibility–and it’s in our interests–to contribute towards securing the future of the euro and strengthening Europe,” said Merkel in a speech at the Frankfurt Auto Show on Thursday.
“Everything that serves this goal should be done, and everything that does not serve it should be left behind,” she added.
Merkel’s comments come after a telephone call Wednesday between Merkel, French President Nicolas Sarkozy and Greek Prime Minister George Papandreou, which aimed to calm markets after several days of volatility.
Following the call, the German chancellery said in a statement that it was “more than essential” to carry out an expansion of the European Financial Stability Facility (EFSF) and issue further Greek loans, as agreed upon by EU leaders at a summit in July. “The Chancellor and [Sarkozy] are confident that the future of Greece lies in the euro zone,” the statement said.
On the other hand:
German Chancellor Angela Merkel bluntly rejected euro zone bonds on Thursday as a solution to the currency area’s sovereign debt crisis, saying that “collectivising debts” would not solve the problem.
The European Union’s top economic official meanwhile said he expected international lenders to be able to recommend by the end of the month releasing a vital next tranche of aid for Greece, warding off the threat of an imminent default.
Spain and France both found good demand for their bonds at auctions, but while Paris’ short-term borrowing costs fell, Madrid had to pay dearly to sell longer-term debt despite support from the European Central Bank in the secondary market.
Speaking a day after the head of the European Commission raised financial market hopes by pledging to present options soon for issuing such common bonds, Merkel said: “Eurobonds are absolutely wrong.
“In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don’t get them by collectivising debts,” she said in a speech at the Frankfurt auto show.
The chancellor, facing rising public opposition to euro zone bailouts, said there was no quick and easy way out of the debt crisis, only a step-by-step process of individual countries putting their fiscal house in order.
Over the last few days I have attempted to be positive in support of the political messages coming out of Europe even though I have been well aware that the economics of the situation simply don’t add up. The renewed issues in Portugal, Ireland and Cyprus and Italy add to the rational argument. What is worrying me about what I am seeing is that it looks far more like a new attempt to “kick the can” by desperate politicians than it looks like a genuine plan for economic recovery.
We may see a resolution of the current EFSF later this month, but Germany has already admitted it can’t save Italy under the current arrangements and Ms Merkel’s attitude towards euro bonds shows there is no real appetite for further expansion. This is an assessment without even taking into account of the opinions of the more vocal opponents of supra-European instruments such as Austria, Finland, the Netherlands, Slovakia and Slovenia.
So yes, I admit I hold romantised ideas about the future of Europe, but the rational part of my brain is screaming at me “it just can’t happen”. However, given the evidence, I am doubtful that anyone within the Euro-elite, ECU or IMF truly understands the mess they have created within in the eurozone, so it is possible that they are still naively aiming for some unattainable goal under some misguided economic ideology. Whether that is the case is debatable but, either way, the final outcome will ultimately be just as terrible.
Back in the real economic world, there were two big economic stories from Europe overnight. The first was the UBS rogue trader:
Swiss banking giant UBS said Thursday that a rogue trader has caused it an estimated loss of $2 billion, stunning a beleaguered banking industry that has proven vulnerable to unauthorized trades.
Police in London said they arrested a 31-year-old UBS trader, Kweku Adoboli, in the alleged fraud. UBS declined to confirm his name.
It is very reminiscent of a similar event in 2008 and anyone with penchant for economic history may be a little concerned about what happens next.
The other event was more positive, with the ECB extending its dollar funding lines for European banks to help alleviate the $US liquidity squeeze:
The euro advanced on Thursday after global central banks joined forces to provide dollar liquidity to the market, a move that could ease funding pressure on European banks.
The European Central Bank said, in co-ordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, that it would lend eurozone banks dollars in three separate three-month loans to ensure they had sufficient funding until the end of the year.
“The announcement would come as a welcome relief to markets concerned about European banks’ access to dollar funding,” said Divyang Shah at IFR Markets.
He said the co-ordination from the ECB, Fed, SNB, BoJ and BoE was likely to raise the prospect that further policy announcements would be made to deal with more than just the symptoms of the eurozone sovereign debt and financial crisis and actually start to take measures to get nurse Greece back to fiscal health, dispel default fears and inject capital directly into selected banks.
Well, let’s hope so. But the solution proposed by Mr Shah betrays the reality of the situation. This is not a liquidity crisis for Europe. It is a solvency crisis for a number of peripheral European nations and hence also the core European banks that lent money to them. They’re gonna need capital all right.
Whatever your opinion of the politics of Europe over the last week, it doesn’t seem to have made much of a dint in the economic outlook for the periphery. Geece’s yields dropped heavily but remain at nose bleed levels and core yields rose, presumably as risk shifted back to the core sovereigns on the chance that Greece is bailed again. There is no way out with current policies.