Notes From Underground

As discussed ad nauseam, politics is trumping the economics of the Greek drama as the European finance ministers are trying to cut and paste a “bailout” solution that satisfies all parties. In what is being reported as terse discussions taking place in Brussels, the Financial Times reported that German Chancellor Merkel said, “There’s not going to be an agreement at any cost.” This Merkel comment is in direct contravention to Mario Draghi’s famous pledge in July 2012, “Whatever It Take” and no taboos.

It was reported that the Populist Finns (in support of the German position) were going to bring down the Finnish government by resigning from the present ruling coalition of a softening of conditions toward Greece was realized. The French are purportedly adamant that the Greeks be given a three-year period of relief in order to get the reforms in place that will be needed to realize the primary surpluses that the bailout agreement calls for. The Germans are pushing back as Merkel does not want to fall prey to French promises that are never actualized. Merkel was bested by previous French President Nicholas Sarkozy and she does not want to appear weak to a German electorate becoming more vocal in its opposition to any type of debt relief toward the “ungrateful Greeks.”

Chancellor Merkel seems to have hardened her stance on Greece after Prime Minister Tsipras played the referendum card for Merkel fears the unleashing of popular democracy through a call for a German referendum by opponents of German guarantees for the debt of the peripheral states. Pressure on Merkel is not from the fringe groups but from many critics found in the mainstream of German life.

There was a July 1 FT article,”ECB Founder Issing Says Idea of Irreversible Euro Was Illusion.” Professor Issing was an Executive Board Member of the ECB and is a highly respected German economist. In the FT piece, Mr.Issing is quoted: “If the Greeks can get away with the violation of all promises, commitments, then I think will have a contagion effect on other countries. Podemos will then tell their voters: the hardships are not necessary. Then we’ll be entering into a monetary union very different from what was intended–it will be the end of the zone of fiscal solidity.”

The growing discontent in Germany over the rising costs of sustaining the viability of the is causing Merkel to rethink her previous compliant stance in supporting the EU Project so beloved by her political mentor, Helmut Kohl. Do not diminish why France is pushing for a three-year deal for Greece. It takes the fear of contagion out of the coming election cycles for Spain, Italy and France and also will move the political needle outside the time of the proposed referendum promoted by David Cameron in the U.K. Greece is not being offered relief for the sake of the Greeks suffering under the hardship of austerity but rather for the benefit of Europe’s mainstream parties. A DEBT CRISIS MORPHS INTO A POLITICAL CRISIS, or history as tragedy.

***Yellen’s speech on Friday: Some chose to spin the Fed Chair’s speech in Cleveland as “hawkish,” but after a second reading I fail to draw the same conclusion. Chair Yellen again seemed to move the goal posts on the Fed’s definition of full-employment by raising the issue “PART TIME FOR ECONOMIC REASONS” (PTER) as an important element in her labor market Conditions Index. The large amount of people in part-time jobs desiring full-time work is “notably larger than has been historically typical in a growing economy.” Yellen notes that this may well represent a structural shift in the economy as service jobs have historically provided more flexibility for employers. (In my opinion this is one of the main elements of having less private unions as service jobs have tended not to be union oriented.)

Despite these structural trends, which make it difficult to know where the share of those employed part-time for economic reasons may settle in the longer run, I continue to think that it probably remains higher than it would be in a full-employment economy. A further clue to Yellen’s dovishness is her point of return to the use of forward guidance: “Because there are some factors, which I mentioned earlier, that continue to restrain economic expansion, I CURRENTLY ANTICIPATE THAT THE APPROPRIATE PACE OF NORMALIZATION WILL BE GRADUAL,AND THAT MONETARY POLICY WILL NEED TO BE HIGHLY SUPPORTIVE OF ECONOMIC ACTIVITY FOR QUITE SOME TIME.“

This is forward guidance, which the Fed had previously stated it was moving away from because of the time constraints it placed upon monetary policy. It seems Yellen was absent from that meeting or is carving out her own position in opposition to Stanley Fischer. But this speech in Cleveland was far from hawkish.

***There’s an important article in the FT by John Dizard. One of the best and most objective columnists in the FT pays homage to Bernard Connolly’s the Rotten Heart of Europe. Read the piece and then buy your favorite people a copy of the book for an early Christmas present. This book will not be available at this price for much longer so do yourself and buy the book  as John Dizard lays out its relevance and importance to understanding the problems facing contemporary Europe.

***There is a June 25 FT Column, “Britain Would Have Fared Better Inside the Eurozone,” by Martin Sandbu. The author argues that the economic weight of the U.K. would have offset the German call for austerity to help ease the debt crisis in the EU. Sandbu also  maintains that the Brits would have been able to prevent the interest rate increases that ECB President Trichet pushed through in 2011. This is naiveté at the highest level. The BOE would never outmaneuver the influence of the Bundesbank, especially so under the rigidity of Trichet.

More importantly, the U.K. used its independence from the ECB to be aggressive cutting rates and invoking a QE program of 350 billion pounds, which led to the significant devaluation of the British pound against its largest trading partner–Europe. From the advent of the global credit crisis, the POUND dropped almost 28% versus Europe–from 2007 to the 2009 high it was almost 45%–ameliorating some of the devastation caused by the deleveraging of the British economy.

This is an alternative Greece does not have (nor does Spain, Italy or France) as they struggle to get out from under the heavy burden of high unemployment. The financial media continues to note the turnaround in the economies of the three aforementioned states but if that is so, why do to the non-mainstream political parties continue to poll so well? Something doesn’t add up in the world where 2+2 =5.

Tags: Angela Merkel, British pound, Dovish, Euro, Europe, Fed, France, Germany, Greece, Janet Yellen, Jean-Claude Trichet, Otmar Issing, U.K.

This entry was posted on July 12, 2015 at 7:57 pm and is filed under BOE, ECB, Europe, Fed, France, Germany, Greece, UK. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.