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.