Olli explains why everything will be alright.

Euroband group fails to destabilise German leader

A strongly pro-eurobond EU faction, helped by some key banking figures, has been working overtime – via diplomacy and in the media – to isolate Angela Merkel, The Slog has been told. The strategy is to dilute her intransigence on the question of eurobonds – without which, the plotters feel, the eurozone will fail. But the eurozone Establishment has moved swiftly to crush the rebellion.

Immediately after the last Sarkozy-Merkel summit (says a reliable Brussels source) senior members of a pro-eurobond elite met, in the afternoon of 18th August, to discuss what they regard as the implacable opposition of German Chancellor Angela Merkel to the concept of a eurobond to create several responsibility for eurozone debt. Over the following weekend they outlined a strategy to persuade Frau Merkel to soften her attitude. During last week, an outline of the programme was shown to at least two European leaders. European sources hint that Jose Manuel Durao Barroso, the Portuguese EU President, was aware of the moves against the German leader, and actively supported their aim. The position (if any) of Herman Van Rompuy is unclear.

In the brief period since, a wave of articles has appeared in the press, focusing on Merkel’s weak domestic position and arguing that she is putting German considerations before the EU. In turn, several pieces – in titles as various as the Financial Times and the Wall Street Journal – have reiterated the case for a eurobond, in every case suggesting that without such an approach, the markets will never regain confidence in the common currency. This was in marked contrast to the previous majority view that now is the wrong time to introduce such bonds.

Like most things EU, however, the plan is half-baked, and has been executed in a kack-handed manner.

“Merkel is only in a weak German position if she goes completely native on EU bailouts,” said one German source yesterday. “She will play to the gallery with German voters and, if anything, the hardening of voter attitudes will act directly against any eurobond. I find it fascinating, if it is true, that there are people in Brussels, and banking, so desperate for a eurobond. It will come, but not now”.

Parisian contacts also suggested last night that Nicolas Sarkozy will continue to support Frau Merkel come what may. “It’s not in his interests to do otherwise,” claimed one well-placed source, “he is desperate to isolate French banks from the contagion. Having been appraised now of how bad the situation is here, Sarkozy would not back a eurobond at the moment. Attaching himself to Merkel’s apron strings is his only hope”.

Meanwhile, the Establishment has already hit back powerfully. Yesterday, Commissioner Olli Rehn made the official position clear to a senior gathering in Brussels:

“…..there are currently rather high expectations on how eurobonds could help solve the debt crisis by pooling the debt issuance of euro-area member states. However, it is clear that eurobonds, in whatever form they were to be introduced, would have to be accompanied by a substantially reinforced fiscal surveillance and policy coordination as an essential counterpart, so as to avoid moral hazard and ensure sustainable public finances. This would have unavoidable implications for fiscal sovereignty, which calls for a substantive debate in euro area member states to see if they would be ready to accept it.”

ECB President Jean-Claude Trichet was also quick to rubbish the eurobond as a short-term solution, continuing to maintain – despite a mountain of evidence to the contrary – that the euro is strong, the banks are well-capitalised, and so a eurobond will not be needed.


Once again, of course, this very clear EU elite denial – unique in that it denies not just the solution but also the existence of a problem in the first place – demonstrates the complete isolation of UK Chancellor George Osborne – a man who has hitched his wagon to eurobonds in recent weeks. But above all, the situation in the EU as of right now demonstrates what The Slog has always felt: when push comes to shove, the individual member States do not love the euro enough to give huge dollops of welfare to those who have overspent unwisely….overspent, lest we forget, the cheap money they were given equally unwisely by private lenders and the ECB in the first place.

National selfishness will prevail. An excellent example of this at present is the sudden demand for collateral in return for Greek bailout 2. The Finns are effectively demanding the next stage of help be a loan secured against assets. As these are the same assets Greece has to sell just to survive, it’s hard to see how that one is going to work.

The Finns and the Greeks started off by working out a side deal, under which Athens would deposit a chunk of cash in an escrow account for Finland to ensure Helsinki’s support for the bailout. That quickly fell apart, because it was an insane idea,  Germany opposed it, and other eurozone nations, including Austria and the Netherlands, understandably demanded the same privilege as Finland. The best part of a dozen EU finance ministries are still squabbling over what to do.

Those of us in regular touch with the markets know exactly how this is playing: very, very badly. When Trichet says the Euro is “a sound currency” because its value is holding up, he is being invidious: his own bank (with US and Chinese help) is buying euros to hold that position. It’s not the price of the euro that’s at issue here: it’s the behaviour of the clowns reputed to be in charge of eurozone finances. From the outside, they look to be exactly what they are – a continent of hagglers, loafers, bureaucrats and self-interested politicians who are not only incapable of concerted action: they are hopelessly vague on what the action should be.
We should all keep a close watch on how the German electorate behaves in the coming days: a week tomorrow, there is the crucial vote to support Greek bailout 2. This (see above) is already unravelling: if the German Parliament rejects it, the euro is dead in the water.