Notes From Underground: Europe … No Escaping the Battle For Supremacy

The question that is framing the most recent debate in European circles is the one asked by Bernard Connolly for the last 18 years: Whose currency is the euro and who controls its outcome? The media has been full of stories about the gathering forces allied against AUSTERITY:

1. The weekend Financial Times and other news outlets had stories about the French Socialist Party issuing a document denouncing Chancellor Merkel  and her “selfish intransigence” over austerity. The “socialist manifesto” also attacks David Cameron but that is a mere sideshow for the U.K. prime minister is a very diminished player in the battle for European financial policy. It is “… the selfish intransigence of Chancellor Merkel, who thinks of nothing but the deposits of German savers, the trade balance recorded by Berlin and her electoral future.” This is a direct assault on Germany and will not play well in the upcoming September elections. Attacks like this will push Merkel farther to the hard money crowd, especially as over the weekend it was reported that the German SPD and Green parties were coalescing on the issue of less austerity and more growth in the whole of Europe.

The French socialists attack Angela Merkel for being concerned about German savers, or as I prefer, the Bavarian Burghers, but that is in fact how democracy works. It is not the French voters that the German Chancellor has to answer to for it is the savings of German citizens that is guaranteeing all the sovereign bond purchases of the ECB, ESM and EFSF. Le Monde reported that the manifesto “exposed a raw resentment against Germany’s dominant position that lurks below the surface.” This week Claude Bartolone, the socialist speaker of the National Assembly “… called for ‘confrontation’ with Germany over its insistence on austerity.” The problem with the French challenge is that President Hollande is a socialist and because they are the party in power, its rhetoric resonates with the German government.

2. The Friday FT had Merkel on the front page raising the issue of the asymmetry within the EU and the problem it poses for the ECB. Chancellor Merkel raised the question: “The ECB is obviously in a difficult position. For Germany it would actually have to raise rates slightly at the moment but for other countries it would have to do even more …. especially for liquidity to reach corporate financing.” Again, how do you resolve the issue?

This week the ECB has a meeting, so does President Draghi move to cut rates to placate the voices of ease while the Germans continue to vocalize the concept of “Growth Through Austerity”? The ECB would have to take the deposit rate negative to get any real thrust from the market for EONIA (Euro Overnight Index Average) is already at 0.08%, a mere 8 basis points. Chancellor Merkel’s question on the ECB dilemma is a move to placate the hard currency crowd. Whose currency is it?

3. One of my favorite journalists, the London Telegraph’s Ambrose Evans-Pritchard, has brought the issue to the forefront. Titled “Bundesbank declares ‘war’ on Mario Draghi bond bail-out,” Mr. Pritchard discusses a position paper brought to the German Constitutional Court, assaulting the ECB‘s Outright Monetary Transaction (OMT) program as violating the German basic law. The German High Court is to rule on the constitutionality of the ECB plan and thus the Bundesbank and its President Jens Weidmann are fighting a rearguard action to halt the power of the ECB and Mario Draghi. Weidmann has continually voiced his opposition to the Draghi “we will do whatever it takes” proposal of last July. The Bundesbank chief has now inserted the Bundesbank displeasure at ECB overreach directly into the September 2013 election.

The Bundesbank has been fighting German politicians over the role of the central bank and its supervision of Germany’s money since the German/French agreement of 1978. The financial fabric of the European Union is so very fragile as last week’s French and Spanish unemployment numbers so clearly revealed. The politics of who will reign supreme in determining EU monetary and fiscal policy is going to create great uncertainty over the next few months and the credit markets will be very important indicators. The present search for yield is providing support for the European sovereign bond market but we will monitor any movement for a change in market sentiment. As Evans-Pritchard quoted German historian Michael Sturmer: “… the tough report is a bid by the Bundesbank to ‘reassert its primacy.'” You can’t tell the players without a scorecard.



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7 Responses to “Notes From Underground: Europe … No Escaping the Battle For Supremacy”

  1. Mark Says:

    I think you touched the heart of the issue here, Yra.

    By some accounts, the valuation of the Euro is too high for countries like Italy. Had they their own currency, they could simply devalue to an appropriate level. The Euro locks them in place as 1000 businesses fail per day. Did Italian businessmen just suddenly become poor at their work? Unlikely. Rather, it seems the Euro is too strong for the Italian economy.

    I am not a fan of all the currency manipulation, but it is occurring worldwide, and the Euro ties the hands of too many countries. The Swiss devalued, and the reason was clear for those who look just beneath the surface: Swiss wages were too high. Devaluation, for countries without lots of natural resources to export, is largely a move to reduce salaries. Cutting wages outright is too unpopular to succeed under most circumstances, so most countries opt to devalue. The net effect is largely the same.

    I find Germany’s supposed moral position of austerity to be disingenuous by the politicians and ignorant by the masses. It’s a fake morality used to beat the other countries into submission, when in fact, the Euro valuation works in Germany’s favor. The common currency is an insidious nightmare for much of Europe, and if one takes a slightly cynical view, it appears to be designed mainly as a weapon to take away sovereignty from countries.

    One wonders how many countries will have to be Cyprus’d before people see what is going on.

  2. asherz Says:

    Those critics of Germany’s backing of austerity versus currency creatianism (with apologies to Darwin), are forgetting Germany’s history of almost a century ago. Post WW l and the onerous Versailles treaty, Germany took its Papiermark and printed it to the point where it was used for fuel in the cold winters of 1920-23. Ultimately it was replaced by the gold backed Reichsmark at the ratio of 1 to 1 trillion. The rise of the National Socialist party and its tragic aftermaths was not totally unrelated to an an extremely loose monetary policy which impoverished a nation. History sometimes does affect approaches that some may not appreciate.

  3. yra Says:

    Asherz–your point has been the mainstay of thought on German intransigence,but as much recent work has shown,the brutal austerity embarked upon by Weimar caused great harm to the economy.This issue is complex and yes,German fears of currency debasement are not to be taken lightly and the Bundesbank has been the guardian of the people’s money.As Germany’s role as European creditor increases its demand for sound money is to be expected.It is always the creditors who disdain inflation.If Germany is not the key creditor then the German backstop for all ECB intervention is just a medium for wealth transference from Berlin to Athens,Dublin,Madrid,Rome ,Lisbon,Paris—as Bernard Connolly has stated over and over—reparations by any other name.

    • Victor Hernandez Says:

      Bernard Connolly made clear that the Bundesbank is only the guardian of its own interests as an institution beyond democratic control and without any target that makes measurable its achievements

  4. asherz Says:

    Yra- Is the model for addressing the present crisis going the route of the ECB in providing guarantees or loans to sovereigns and preventing bank failures, in effect solving a debt problem with more debt, or following the road taken by Iceland which resulted in greater short term pain but cleared the decks for future growth? Japan has given us more than a two decade example of the former path, a path that Bernanke has been following. It is always easier to postpone paying the piper but the piper ultimately must be paid.

    The surpluses generated by your Bavarian Burghers is not unlimited, and unless you carve out the rot, (by defaults and restructurings), and change the cultures of the southern periphery, a task that is sociological and not monetary and well nigh impossible in the time necessary to prevent a Euro collapse, the road now taken can only end badly. The solution will either be to allow the markets to take their natural course (the Austrian School), resulting in economic upheavals which will allow new sprouts to grow after the conflagration, or hyperinflation which will destroy almost all wealth and savings. Political leaders and central bankers will always choose the one that may postpone the implosion for the next guy making the decisions.
    Unfortunately, there are no painless roads to take. As the philosopher said, when you come to a fork in the road, take it.

  5. Says:

    In fact, those old-school agreements more often than not aren’t all you ever so pay the loan, and it is a hard currency advance. payday loans instant Consider for this intellect, the pace of involvement of on-line payday loans are a bit higher than early regular loans.

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    […] Notes From Underground: Europe … No Escaping the Battle For Supremacy […]

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