There is an interesting article here from Spiegel online. It highlights the difference between the periphery nations (that now seem to have been joined by France) and the core (lead by Germany). Here is how the 2 opposing camps seem to be lining up. This list is compiled on the basis of official government comments, either in support of, or in opposition to, Eurobonds.
|The Periphery (support Eurobonds)||The Core (against Eurobonds)|
The following countries have not publicly expressed an opinion (that I can find) - Malta, Estonia,
President Hollande of France has been touting growth strategies financed by Eurobonds, that are issued and backed by all 17 nations. These would then be used to finance further deficit spending, to grow out of the crisis. As you can see there is a growing number of countries that are backing Hollande in this spat. Germany is unlikely to cave in, until the situation starts to look bleak. According to the article above, Merkel is waiting for the French elections to be completed, before releasing her rebuttal. This will highlight a 6 point plan, that involves very little extra expenditure and no Eurobonds. The only extra commitments that Germany will accept, is their share of funds to the EIB investment in infrastructure plan, that is projected to be €10 billion. The German contribution would be €1.6 billion, which is hardly worth mentioning. The German plan revolves around reducing workers' employment security and business regulations, to enable businesses to start up and operate more easily. This will enable public ownership stakes to be privatized, to reduce deficits and increase competitiveness. This is the same position that they have held since the start of the crisis. It appears that they are just re-jigging their present plan.
If this response is rejected by the new coalition of Eurobond supporters (which seems likely), Germany and the core have 3 choices:
1. Hold their ground.
As the EU treaties would have to be changed to allow Eurobond issuance, the Core can just refuse and the debate ends. It is irrelevant that a majority of nations want the common bonds. Diplomatically, this does not look like a good solution. It may be the course that is taken, but it will be very unpopular.
2. Agree to Eurobonds.
I would suggest that the position will need to be very bleak, for this to be their chosen route. The European Union may get to this stage, but it is not presently there.
3. Germany suggests that it may be better for it to leave.
I have long felt that Germany leaving the Euro is the most likely outcome of the present European problems. If the Germans were to threaten that the Euro would be better off without them, the periphery nations would lose all access to lower rates. It is a threat with teeth, that may silence the other nations. There may not actually be any intention to leave, just a threat to counter the pressure from the pro Eurobond group. If calls for Eurobonds become louder, Germany will increasingly be viewed as the country that is responsible for European woes. Germany leaving will remove that accusation. The rest of the nations could then do whatever they wanted.
It is very difficult to predict how the European situation will resolve itself. Germany is coming under increasing pressure and is now in the minority of nations. The French elections are on June the 10th and 17th. Soon after the 17th, we will get a German response. If this is just a repeat of their present position, the pressure will just grow. Will they respond with a threat to leave? It must be an option that they are discussing. The latest opinion polls show over 60% of Germans do not want to offer further support to Greece. A hard line by Merkel may help her poor showing in opinion polls.
The German threat (if made publicly), of leaving the Euro, would have a devastating effect on the value of the currency. Take away the strongest member and the union is weakened. This would also raise the possibility of other strong nations exiting. I wrote an article recently discussing the EUR/USD pair. The Elliott 5th wave seems to be playing out as discussed in that article. It is possible, that if the situation is not resolved and the Germans threaten to leave, we will see the downside target of 1.10 achieved sooner, rather than later.
As any of my regular readers will know, I am presently reading Manias, panics and crashes by Charles Kindleberger. It is a very interesting read and better than most books on crises, that I have read so far. There is one paragraph that I cannot resist repeating here. After the event, Herbert Hoover commented thus, on his approach to the financial crisis of 1929-33:
The leave it alone liquidationists as headed by Secretary of the Treasury Mellon felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. He insisted that, when the people get an inflationary brainstorm, the only way to get it out of their blood is to let it collapse. He held that even panic was not altogether a bad thing. He said 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted and enterprising people will pick up the wrecks from less competent people.
Priceless, imagine that approach today. What would Mellon have to say about the approach of our Timmy (Tim Geithner)! It certainly explains the deflationary collapse from 1929 to 1933. One other tit bit from the book
In 1873 the national Trust Company of New York had eight hundred thousand dollars worth of government securities in its vaults, but not a dollar could be borrowed on them: and it suspended.
This reminds me of the present situation in Europe. The next LTRO seems to be handicapped by the lack of eligible collateral. My take from Kindleberger's book is that all of the events of this present crisis have happened before. The way it has been handled in the past, seems to differ from the present crisis. We seem much less worried about moral hazard or intervening in the system. What that will mean for the outcome of this period is difficult to predict. However, to date, all of the past crises have lead to the excesses before the crisis being fully unwound at a later date. I doubt that this one will be any different. I can only suggest that the present policies will make this crisis more drawn out.
Disclaimer - This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.
Additional disclosure: Long RWM, RIMM, USD/JPY, various U.K. corporate bonds