The 'Merkel Intervention' - A German Response to QE2?

Includes: ERO, EU, EWG, IGOV
by: Javier Paz

German Chancellor Merkel has been in the news a lot the past few months, saying undiplomatically that Europe needs fiscal discipline. These actions have won her the approval of the German electorate that does not like the idea of bailing out irresponsible EU nations, but also the displeasure of EU neighbors in dire straits.

Merkel has been a dissonant voice in EU politics, where the norm is to move forward incrementally through painful and lengthy consensus. She has even criticized the European Central Bank for its purchase of EU sovereign debt.

Up until now, it would have seemed more likely that a German Chancellor would seek to nudge (not push) other EU nations and EU organizations in a certain direction.

Perhaps we have seen this through the wrong perspective.

It could be that Germany has engaged in a Machiavellian plot to promote its interest through the unconventional Merkel. If euro countries were to ultimately expel some of its members because it becomes apparent that they cannot be rescued or they cannot adopt the fiscal remedy needed, what's the big harm to Germany?

It is quite possible that a failure to the euro could be a victory to Germany. Germany is taking a bold position because it believes it finds itself in a position of strength.

If the EURUSD were to continue to fall due to the higher risk of breakup, how is this negative to German exporters or German economic growth or German debt borrowing?

German banks, including the mighty Deutsche Bank (NYSE:DB), have debt from countries that may default. But it is also conceivable that German policymakers have concluded that the cost of rescuing its large banks will be far less politically acceptable than the cost of rescuing whole EU nations.

Indeed, the biggest danger to Germany is that the current free global market of goods and services becomes less free. And this is a clear possibility if the world comes to perceive Germany as promoting a stealth breakup of the euro.

Some have correctly accused the Fed of weakening the USD through its QE 2 policy. Perhaps it is time we start to recognize that the Merkel government may not be far behind - weakening the euro under the guise of EU fiscal reform.

Disclosure: No positions