Notes From Underground: Hollande Gets Saucy With the Germans

First, the equity markets continued this week’s rally as better data in the U.S. (housing) following upon the Monday retail sales report provided more fuel for the bulls and is causing great angst for portfolio managers that are underinvested and badly underperforming their benchmarks. These investment advisers must go to sleep and pray for the U.S. to bomb Iran so that they will have some type of opportunity to buy into the global equity rally. It’s tough to chase this one. As I wrote on Sunday, the IMF “volte face” on the impact of austerity budgets was a game changer as it will mean that austerity inspired programs, like the U.S. fiscal cliff, will force policymakers to be cautious in pushing for too much austerity in times of a balance sheet recession. The pushback from Spain, Italy and others is allowing the forces for unrestrained growth to gain ascendancy over the voices of austerity led by the Bundesbank.

Today, French President Hollande was feeling a new sense of vigor. In a U.K. Guardian interview, “Hollande Fires A Warning Shot at Merkel Over Austerity on Eve of EU Summit,” Hollande noted “Merkel is too preoccupied with domestic politics.” The president also noted, “We all have our own public opinion. Our common responsibility is to put Europe’s interests first.” This is an interesting view coming from France, a nation that is struggling itself. If the situation in Spain and Italy doesn’t get resolved in a pro-growth, less austerity format, France will continue to suffer economic malaise. Hollande also calls for a budgetary union and suggests that there should be a mutualization of debts through the issuance of euro bonds. The problem is that Germany wants a fiscal union first and then euro bonds while France desires the opposite. Yes, Chancellor Merkle is under political pressure at home not to proceed too quickly for the Germans need to measure the cost of a backdoor bailout  that would be the net result of EURO BONDS today  and fiscal union tomorrow.

The French want the Germans to supply the gold but they want the peripherals in coalition with the French to write the rules. President Hollande even admits “that whoever pays should control, who ever pays should sanction,” however first the money must be delivered and then the rules agreed to. It is very important to remember that for the last 50 years it has been the French who have been the most reticent about surrendering sovereignty to the EU. The Germans are “dragging their feet” but it the Bavarian Burghers that are paying the bill. When the French are pushing a speedy end it is time for the Germans to be cautious.

***Late in the day, there was a rumor that the EU Council’s chief legal adviser noted that the proposed European banking supervisor plan was illegal under present treaties. It was reported that the proposed ECB supervisory role “goes beyond the powers permitted under law to change governance rules at the ECB.” Again, this was rumored and although a quote offered–the sources remain unnamed–but it reflects the great battle taking place over the speed of a EU-wide banking authority and the influence that it would attain.

***In Spiegel Online, a German think tank advised “Euro exit by Southern Nations could cost 17 Trillion Euros.” This was a specious headline and upon further reading the research was shown to be measured to 2020. The article notes that the impact to global economic growth from any type of EURO dissolution would be severe. China, the U.S. and all the emerging market economies would be gravely affected and the resultant banking crisis from huge losses to bank sheets would create a deep global recession. This article reflects that not all Germans are enamored with austerity  and that voices of do whatever is needed to support the entire EU are also to be heard. The battle lines are being drawn and the voices of growth at any cost are rising with the IMF‘s new research providing the impetus to curtail those promoting AUSTERITY IS THE PASSAGE TO GROWTH.

***For a different view on the IMF research, this Financial Times video piece by John Authers will question the IMF austerity data. The issue will be before us for quite a while and even though we are all suffering from EU FATIGUE, to not know the issues and be prepared will prove costly. Let us arm ourselves with the knowledge to be prepared for all the different misinformation that will move markets.

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2 Responses to “Notes From Underground: Hollande Gets Saucy With the Germans”

  1. Frank Says:

    Tacoma, WA. Hi. Bavarian Burghers just doesnt sound right. Better would be just Bavarians. But then that would refer only to citizens of Bavaria. Probably just Burghers would have been better. Frank Rogers

  2. yra Says:

    Frank—I am trying to give you prime rib and you are worried about Burghers???Couldn’t resist but point is made but I disagree as I was a big fan of the Mrs. Watanbe term for the Japanese retail trader.

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