Merkozy looks to limit hypocrisy

The night started well:

German business confidence ticked up unexpectedly in November, reversing a four-month decline, data from Germany’s Ifo research institute showed Thursday.

The stronger-than-expected figures help offset rising concerns that Germany is being dragged down by the debt and banking crisis, following a disappointing government debt auction Wednesday that was taken as a sign that investors are now shunning even the safest euro-zone assets.

Ifo economist Klaus Abberger warned that the modest November increase shouldn’t be taken as a trend and reiterated the institute’s view that economic stagnation is possible in the next two quarters, with hardly any momentum from abroad. However, Mr. Abberger said the euro zone’s largest economy is only expected to undergo a slowdown, as opposed to entering “freefall.”

All markets were up on the news and with the DAX managing to gain 1.75%, but after that it all went a little wrong:

German Chancellor Angela Merkel again ruled out joint euro-area borrowing and an expanded role for the European Central Bank in fighting the debt crisis.

Euro bonds are “not needed and not appropriate,” Merkel said today at a press conference with Italian Prime Minister Mario Monti and French President Nicolas Sarkozy in Strasbourg, France. She said euro bonds would “level the difference” in euro-region interest rates. “It would be a completely wrong signal to ignore those diverging interest rates because they’re an indicator of where work still needs to be done.”

And those words led quickly to this on the DAX:

But more importantly, Merkel’s words did this to Italy’s yields which, somewhat ironically, was the main reason Mario Monti was meeting with Merkozy in the in the first place:

Now, I can’t be sure why this particular time that Merkel rejected a supra-European debt instrument that the market took it so badly. It is not as if she has suddenly changed her mind, in fact she made the exact same statement 24 hours before the press conference. As far as I am aware, nearly every time over the last 12 months anyone within the EU mentioned “euro bonds” it was almost immediately followed by the words “.. are not appropriate at this time” by someone from the German parliament. However, the markets didn’t like it at all so equities fell and bond yields for all euro countries went up along with their CDS.

The conference did however have an outcome. We have yet another “plan for a plan” coming our way:

“Trust has been lost,” said Ms. Merkel. “That is why it is important that we demonstrate that we trust each other and trust that each of us individually is doing his homework back home. We want to demonstrate that we have to take steps towards a fiscal union, that policies must be more closely coordinated if we want to have a common, stable currency.”

The three leaders didn’t spell out what kinds of changes are in the pipeline. However, they said they will present a plan ahead of the next European Council meeting Dec. 9, including proposals to grant Brussels oversight and disciplinary powers over national budgets that exceed euro treaty restrictions on public debt and deficits.

So let’s just take a look at exactly which countries are sticking to the current Eurozone treaty restrictions of an annual budget deficit of no more than 3% and a public debt to GDP ratio of less than 60%, as described in the stability and growth pact.

Not France or Germany it would seem. So I can only assume that the latest “plan for a plan” will include some revisions of those rules so that Sarkozy and Merkel doesn’t look so embarrassingly hypocritical while berating other nations about their public debts.

From the press conference it would seem we have at least another 3 weeks of dithering before we are going to see anything new, in the meantime the periphery continues on its path of self-reinforcing economic misery:

Fitch downgraded Portugal’s credit rating to junk status on Thursday, citing large fiscal imbalances, high debts and the risks to its EU-mandated austerity program from a worsening economic outlook.

The ratings agency cut Portugal to BB+ from BBB-, which is still one notch higher than Moody’s rating of Ba2. S&P still rates Portugal investment grade.

Fitch said a deepening recession makes it “much more challenging” for the government to cut the budget deficit but it still expects fiscal goals to be met both this year and next.

In other news , Portugal strikes,  Malta’s unemployment falls , and Romania is unhappy with Austria’s new banking plan.


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  1. good summary DE, “I can’t be sure why this particular time that Merkel rejected a supra-European debt instrument that the market took it so badly.”

    exactly, global markets have got the ridiculous point where they are ignoring real economic data and jumping at shadows and trading on every little and often meaningless headline. totally irrational market behaviour that is always seen at market bottoms.

  2. When Germans start rejecting Euro notes that have a serial number starting with F, G, M, S, T or Y, you know that you’re into the end-game. Oh look, they already are!

  3. It’s easy to understand why no Eurobonds will be agreed to by Germany. Why put your financial future in the hands of the cheating Greeks who increased effective debt levels through financial engineering.

    What I find harder to understand is that all countries don’t see that the ECB buying huge amounts of existing debt at heavily discounted prices during a European recession/credit squeeeze/high interest rate environment and then writing it off or deferring interest if certain financial constraints are met.

    Nearly all the Euro countries have excessive debt, particulalry if bank recapitalisation cost are included.

    Does Germany really think that European depression in the periphery and recession in the core will be a better result, or are they just waiting for absolute despair in debt markets until they agree to a limited window during which the ECB will stand in the market for existing debt at slightly better than the worst market rates.

    At that time, with stabilised debt, they could get of the Gold/Bretton Woods style Euro at parity for all nations but remain a free trade zone if they wished.

    MMTers would understand that with agreement from all Eurozone governments, the ECB can do whatever it takes.

  4. As someone who doesn’t normally like politicians of either persuasion I’m developing a soft spot for Ms. Merkel. She has taken a very principled stance on these issues (i.e. money printing and eurobonds) and is sticking to her guns despite massive pressure other countries. If you print money or create a debt union the PIGS etc. are going to backslide on reform. Such leadership is rare on the political stage these days. Well done.

    • No, no. She’s still a politician! Merkel hasn’t ruled out Eurobonds under different conditions. Which is code for fiscal union. However this would require amendment to the constitutions of 17 member states, which, even if agreed upon, could not possibly occur before the dissolution of the Eurozone anyway.

  5. What good would Eurobonds actually do? Isn’t the EFSF issuance a broadly similar concept, on a look-through basis? At the end of the day the Germans are the only ones in Europe with any money.

    Surely Eurobonds would simply price at a level reflecting the relative credit ratings of the underwriting economies and the proportions to which they each back the debt. Which would mean that funding costs fall for the periphery and rise for the core. Am I missing something?

  6. My take on this is that the proponents of Eurobonds pursue the concept a) first arguing it is going to solve the financial crisis/budget crisis (which it won’t), but then later b) try to enforce a fiscal union as the real solution.

    Governments have borrowed spent, but now that investors realise those debts basically will never be paid off, it’s either:
    – bail them out by the central banks and print money
    – let Govs default and cause chaos

    The big winners will be:
    – bureaucrats and bankers
    – owners of inflation proof assets

    Although Gov debt in Australia may sometimes seem low, some states here are basically the same as Greece.

    QLD debt is +/- 82 billion AUD or 20k per resident. If it were a company it would be declared bankrupt or insolvent. Eventually the Federal level will bail QLD out, and the RBA will probably in turn bail out the AU Gov by printing money (aka buying bonds).

  7. Markets don’t move *because of* news. News can sometimes merely be grease for the move (up or down) that was coming anyway.