You know that the knives are out when the drumbeat from the financial press is both that (a) the December 9 European summit accomplished nothing, even if it is implemented, and (b) that the arrangements agreed upon would require the nations to cede too much sovereignty to the EU administration in Brussels and therefore should be rejected, not implemented. When an event is greeted with contradictory derision, something deeper is going on.
I will readily grant that the arrangements agreed upon were less than a true fiscal union or a more complete political union. Such more far-reaching steps might be good steps for Europe to take in the long run, but they do not yet appear to be steps that the nations are ready for. What may be possible is incremental progress toward a closer union.
The more limited steps agreed upon (not yet taken by the national governments that have to support them) will leave the internal balances of trade among the European nations unaffected by the major formal actions that were taken. Germany will remain in substantial surplus while the southern nations will remain in substantial deficit, at least for the short run. And Germany has refused to provide an open-ended promise to transfer funds to the southern nations, as many market commentators would like it to do. That leaves the hope that the southern countries will, over a medium term, liberalize their labor and regulatory regimes to permit competition to create greater efficiencies and, thus, to increase their relative competitiveness. Whether they will do that remains to be seen. Italy’s first steps have been hampered by entrenched forces whose power has prevented a number of proposed liberalizations. Spain has an elected conservative government that may have an easier time.
I think Germany should be excused for refusing to commit itself open-endedly. That just seems prudent to me. And if Germany did commit itself open-endedly, that would release some of the pressure on the southern countries to restructure their economies, in which event they probably would not do so, and little would have been accomplished.
German Exposures
Despite the German decision not to commit itself open-endedly, Germany has permitted several initiatives to go forward that effectively have increased its financial commitment to the success of the southern nations. These include more money for the IMF, moving up the permanent stabilization fund to June 2012, commencing the temporary stabilization fund promptly, permitting some state-owned Landesbanks to purchase bonds of southern European countries, various steps the ECB has taken to prop up the banks, including long-term loans of up to three years (half a trillion euros borrowed, Dec 21), with another opportunity for banks to borrow on the same terms in February), and continued ECB purchases of southern European sovereign bonds. In addition, it appears that through the European payments system, either the German central bank or the ECB is exposed daily to substantial short-term credits to southern European central banks, with the ultimate creditors and debtors being German banks on the creditor side and southern European banks on the debtor side. All of these exposures combine with the importance of the southern European markets for German products to make it extremely unlikely that Germany will permit the euro zone to break up significantly. Greece and Ireland may not be very important, but Italy and Spain are of great importance to Germany both on the downside and on the upside.
The Euro and the Press
That brings me back to the press and the commentators. The role of the press in events like the eurozone crisis is highly interactive. Confidence is what the near-term issues are about, and confidence is in the air that we breathe, the stories we read, the people we talk to, and even the jokes that traders make. In the cacophony that results, major financial newspapers can be very influential.
For differing reasons, the Wall Street Journal and the Financial Times do not seem to like the euro. Most of the online commentators that I read also do not like the euro, and many of them are more open about their prejudices than the major newspapers. Some relatively few commentators, like me, for instance, favor the single currency effort. I think it is important to the European experiment as a whole, and, as I have written on Seeking Alpha, I believe the world is a safer, saner place with the EU and the eurozone than it would be without it. Therefore, although I admit that the eurozone’s architecture is faulty, my commentary tends to be more upbeat about the possibilities of the single currency’s survival.
The dislike for the euro falls into two basic categories. The more British, more technical category views the euro as inherently unstable because of its faulty internal architecture. It is bound to fail, unless the architecture is corrected, and it is unlikely that the nations will cede enough sovereignty to do that. Moreover, if the nations of the eurozone did cede sufficient sovereignty, that would leave nations like the U.K. outside the fold and would tend to reduce the generality of the EU.
The Wall Street Journal’s and the right wing’s view is that the euro is a socialist plot against capitalism and should be defeated on that ground. The Journal does not say that; it is too circumspect. But many on-line commentators are not afraid to make that point quite directly. They talk about “nanny-state socialism” and the like.
Almost every day this week, beginning Monday, December 12, the Wall Street Journal’s front page has beaten the drum that what the European leaders and the ECB accomplished last week was inadequate and likely to fail. It would be tedious to quote from each day’s newspaper. You can go to WSJ.com for yourself, if you doubt my conclusion.
As a consequence, as readers/investors, we have to look through each publication’s biases, but we also have to recognize that out of the mouths of the powerful, the biases, through the publications’ influence, become part of the truth that the marketplace perceives.
In the coming weeks there will be a classic struggle between forces that want to bring down the euro and break up the eurozone and forces that seek to preserve and deepen the ties that the eurozone represents. I do not know which side will win. Quite possibly there will be no winners except those that have shorted the right instruments. But as readers and listeners, as investors who must make our own decisions, we need to be aware of the biases of those we read and hear.
I have confessed to my own bias in favor of the European experiment. In many ways, I dislike its architecture, but it is their architecture, not mine.
