This has been a most fascinating study in situational analysis, currency markets, sovereign debt, and threat response.
I’m not talking about Greece. No, no, no. After they issued their 10yr notes and announced their “super-austere austerity measures,” everything’s right with the world again. No plagues of locusts. No pestilence. In short, no apocalypse. Sorry, sir. Come back next week. We’ll be ready for you and the other three horsemen then.
So why are we still talking about it? More to the point, why are Germany and France still talking about it? And rather heatedly – and publicly – at that?
First we got reports of a bailout for Greece (remember, they just successfully issued 10yr notes the week before). Then we hear “not so much.” All the while, German finance minister Schauble wrote a shrill op-ed piece in the Financial Times that caused the FT’s own Gideon Rachman to chide the German finance minister. Not to be outdone, French Economic Minister Christine Lagarde then hits out at the Germans. And then the Germans hit out at Lagarde. Lots of “hitting out” these days, but I like the phrase and am only too glad to write it…
But let’s take a moment, step back, and think. What’s going on here? Edward Hugh over at A Fistful of Euros (I love that name, and I don’t even look like Clint Eastwood) takes a stab at just that with this piece, and I see a lot to agree with. But there are some things I’m not quite as sure of as he.
I for one, don’t think Herr Schauble’s FT piece as groundbreaking or earth-shattering. Far from it. In it, I see a dog whose bark is a lot worse than its bite. Both he and Lagarde are talking in stern, blunt terms in the press, but I can’t help think that a lot of it is theater. He needs to sound tough and immovable because he’s being met with a force that he probably sees as being unstoppable (i.e. France’s position, along with many other European countries). Local politics demands some of this on both their parts, and some of which is probably just both sides making their best efforts to poke each other in the eye. It’s France and Germany after all, and this shows me the relationship is the same as it ever was. Plus, I think we all need to keep in mind they both want Euro stability. Lagarde obviously favors a lighter touch in terms of fiscal policy discipline, hoping that coddling nations via bailouts and more debt will forestall defaults, currency be damned. Meanwhile, Schauble is at the opposite end of the spectrum: let the wreckless learn their lessons, but we’re not going to save anyone unless it means we’re saving ourselves in the process. Two approaches, but the same end in mind.
Plus, the chart illustrating Mr. Hugh uses that shows this is – at its core – a banking crisis, is probably the hardest-hitting fact about the situation. The banks are thoroughly integrated into the Eurozone, so an issue for one country can very well cause problems for banks from another country. That presents a whole host of issues as the ability for banks to fund themselves and operate globally is now a victim of its own success since rules and regs have not kept up with the ways modern banks operate.
We know Eurozone recovery will be muted for quite some time, and given the economic integration that has taken place so far, Germany is pretty much in a box. They need strong, robust export markets to send their goods to, but at the same time, making some of those export markets more robust requires them to invest more in those economies. I don’t say consume, because at the end of the day, consumption is just consumption. True transformational economic growth comes through investment and the free flow of capital. But nevertheless, Germany needs to see more favorable investment opportunities where it can put its surpluses to work for satisfactory risk-adjusted returns (at least I hope they’re risk-adjusted).
But Herr Schauble did allude to the need, in his mind anyway, for European countries to be more involved with their neighbors’ finances. To me, that is the point that is more significant because of its ramifications. Governance of countries on the Continent is expected to involve more parties. A man’s home may or may not really be his castle anymore.
And so, that’s what I see the endgame being, and this is just the first step. We could be witnessing the first tug o’ war between France and Germany over how any EMF or EMF-like organization is structured, run, and/or operates. Will they be willing to take a hard line as the Germans are going to demand or will they go soft with the French? Also, the topic of fiscal union is being thrown around, and you can see the concept of national sovereignty being chipped away at. But these aren’t small chips. These are pretty good sized, with the potential to cause massive changes in how people view government and what it means to be a citizen. A citizen of where? Of what? If that happens, what kind of fiscal union will it be? One that offers the fiscal equivalent of the “Greenspan-Bernanke put” or will they force union members to be disciplined in their spending and savings, with the real possibility of default as an outcome? Only time will tell.
In the meantime, I hear there’s a One Ring to Rule Them All sale going on now. Maybe we should put it out on eBay and have Sarkozy and Merkel try to outbid each other for it.
Hey, it beats watching them in a Rock-Paper-Scissors match-up…