The more things in Europe are reported as “calming,” the stranger the news stories that emanate from the various European capitols. In the weekend Financial Times it was reported that President Sarkozy told his citizens that they needed to act more like Germans. If France is to avoid slipping into a terrible sovereign DEBT CRISIS the French are going to have to adopt German-style frugality and a better work ethic. Sarkozy believes that the 35-hour work week must change for as France worked less, the Germans invoked the HARTZ IV program of structural changes to its labor force. Under the leadership of Gerhard Schroeder, the German unions voted for labor austerity in exchange for business not exporting jobs to lower-cost regions in Eastern Europe.
The French were instilling programs that strengthened its unions while many DEVELOPED MARKETS WERE BEING RAVAGED BY THE DEFLATIONARY IMPACT OF THE CHINESE LABOR FORCE. The end result is that Germany became more price competitive while the French, Italians, Spanish and others in Europe and elsewhere were less competitive, and thus imported more and incurred large current account deficits. Thus, President Sarkozy is asking the French to be less self-indulgent and more like the austere Germans. This shows how pressed the European peripheries are to solve their problems and especially how low the French have fallen in the past two months.
The bailout of DEXIA has caused Sarkozy to realize that Chancellor Merkel has now attained the premiere political position in Europe and Germany and its fiscally prudent allies will be pressing their advantage. Mr. Sarkozy may at this point be wishing that he had not prevented Axel Weber from governing the ECB for without the Germans in command of the BANK, the price for Germany’s support for any bailouts is increasing exponentially.
Again, President Sarkozy is in such a weakened position that even the basket case Berlusconi was able to deliver a stunning rebuke of French WILL. Mario Draghi is now heading the ECB and Bini Smaghi will probably remain on the ECB executive committee contravening a previous French/Italian agreement. Now it seems that Mr. Trichet will not be the most Germanesque Frenchman since Vichy. Sarkozy is up for the role.
*** A significant data release last week was Friday’s Spanish unemployment report. More than 5 million Spaniards are without work, resulting in an UNEMPLOYMENT RATE OF 21.5% and that is even with many transient laborers who have been returning to Latin America. This is a very troubling number especially as the EU is asking the debt-plagued Spanish to invoke further austerity. How much political support will there be for further austerity when so many are out of work? In the EUPHORIA about the “BAILOUT,” the reality of economic retrenchment was overlooked. The question remains: How long?
*** This week is filled with important economic news. The AUSSIE (RBA) will announce their interest rate intentions Monday night at 10:30 p.m. CST, and it appears that there will be no change from the present 4.75%. Wednesday brings the FED‘s FOMC release and with the current equity rally and some European calm, the consensus is for NO CHANGE in the FED‘s current stance, Bernanke will not want to waste his resources, especially in the face of Friday’s G-20 meeting in CANNES.
It seems that world leaders are placing a great deal of importance on the G-20 taking a strong position on aiding the DEBT-PLAGUED Europeans. The MANDARINS in Brussels have been begging for the Chinese and other BRIC countries to help Europe stem its crisis so much is expected in financial terms. The 2011 year was an opportunity for Mr. Sarkozy to shine as he was the President of the G-8 and G-20 and he had a robust agenda. As his term ends he appears as a humbled civil servant begging for ALMS from the Emerging Economies. (“Vanity of vanities, all is vanity.”)
***Also, this week brings an ECB meeting, the first one chaired by Mario Draghi. There has been a loud call for Draghi to assert himself and cut the ECB overnight rate from it present 1.5%. I would be shocked if Draghi did this at his first meeting. As the ECB meets on Thursday and the G-20 convenes on Friday, a rate cut would probably be chaired by the U.S. and others. But it would be a tremendous statement about President Draghi’s leadership but it ain’t going to happen. There will be a press conference so Mr. Draghi will be able to present himself to the world’s media. Let us hope that he is not as arrogant as Trichet.