Merkel….dial nein, nein, nein

Only logical route for Greece now is euro exit

This after Spiegel wrote yesterday about ‘new eurozone treaty’

The European Union is, literally, starting to fall apart

Under pressure after the Pomeranian election results saw a 20% drop in Christian Democrat (CDU) support, it has emerged that yesterday (Monday) Chancellor Merkel of Germany made a commitment to senior CDU figures that if Greece is seen to behind on its austerity programme, then the ailing ClubMed country will not receive aid payments due this month. The pledge was later repeated by her Finance Minister Wolfgang Schauble to other Party chiefs. In both cases, the remarks were made in private. By the early ours of this morning, financial websites and media were writing that Athens now has little choice but to leave the eurozone.

The significance of this development cannot be overstated. Although technically an assigned schedule had always been in the detail of the agreement, it had been generally understood (and accepted) among credit managers and Greek Ministers that signs of genuine progress would attract a relaxed attitude to the letter of the deal. The first and obvious ramification of this is that we can expect to see a further spike in Greek borrowing costs today and going forward. So whatever domestic advantage is gained by the CDU’s leader will be wiped out by increasing the likelihood of that which she has pledged to frown upon. You really couldn’t make this up.

There’s no way back for Greece from here: we could see it say goodbye to the euro within days.  Without decisive action, the Euro is also likely to come under increasingly severe selling pressure as the financial crisis spreads. The EU and IMF can continue to provide the funds agreed under the existing bailout programme, but if the Germans pull out on the basis of missed targets, there is no bailout  fund. On the current trajectory Greek public debt is likely to be at least 180% of GDP next year. The collateral row also illustrates that there is a high risk that the second bailout will unravel within the next few days. As Forex notes this morning:

‘Greece will have to reflate its economy and default on its sovereign debt to help secure a medium-term recovery and this will not be possible within the Euro-zone. It is increasingly likely that Greece will be sacrificed politically and economically in an attempt to keep the rest of the Euro area intact and aim for a more orderly move towards greater fiscal union even though this may be politically impossible.’

I think that sums up the current madness rather well.

The second point about these leaked promises is that, once widely known, it makes even clearer to the markets that there are now three sources of help for the EU debtors, each of which has a different policy on how to crawl out of the large hole where  Europe’s economy used to be.

Now installed as the IMF’s boss, Christine Lagarde has (almost certainly under Fed Reserve pressure) volte faced from her French Finance Minister stance of managing austerity (an austerity that never happened there) to one now which is very clearly hawkish on stimulus. Rather than demanding Greek discipline, the IMF/US view is now a Keynesian one: go for growth, because there’s no way you can keep up the repayments with the economy as it is.

But on the other side is the Merkel juggernaut, continuing (along with Van Rompuy and others in Brussels) to insist that fiscal discipline is the only way the euro can survive.

In the middle is Jean-Claude Trichet’s ECB Board, which remains split (I understand at 9-4 in favour) on the subject of Greek and Italian bond buying  – theoretically a form of QE. But the central bank too continues to insist on keeping to the debt/asset sales schedules in Greece – although it has hinted strongly that there will be no further eurozone rate rises in the foreseeable future.

I am  told that once CDU chiefs realised the talks had leaked (and why would they not?) the Chancellor gave clearance for others in the Party to brief the media formally. Thus, last night CDU finance expert Klaus-Peter Flosbach said on the record that, “The basis for all these programmes is that we provide aid under certain conditions. There can be a situation in which we are no longer willing to help when the conditions aren’t met.”

Later still, FDP Coalition partners joined in on the official line – understandably, given they were totally expelled from the Pomeranian Parliament at the weekend elections.

“Greece must keep to the conditions or it just won’t get the money,” Hermann Otto Solms, the deputy floor leader and finance spokesman of Free Democratic Party said in Berlin.

Nobody as yet has seen much point in telling the Germans that, without a eurozone consensus, they can’t do this anyway. But it has been clear to most observers for nearly a year now that this is a game for 27 players in a talking shop, and then the Germans win.

Tomorrow, the BundesCourt is due to rule on bailout legality. One wonders how relevant that is any more.

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I’m torn yet again here as to whether Frau Merkel and her colleagues appreciate precisely the signal they are sending out in making these (effectively new) conditions for Greek bailout. My instinct is they must; I just don’t see where they think the logic leads.

As I’ve already noted, it can only make the Athens situation more desperate. But the private view in Berlin may, by now, be that Greece is a dead duck…a view with which all sane observers must concur. Even worse however, (a) it spooks the markets yet again on the only thing they – being vultures – care about: who’s guaranteeing our money? And (b) it is terrible timing in the light of Italy’s rapidly worsening situation. Finally (c) with US stock futures down 2% already, the post Labor Day lab-rats may well panic in the light of this new mess.

The question now is how long the Greek denial can continue. When Forex says ‘days at most’, maybe that’s wishful thinking for a company engaged in currency exchanges. But sources have made it clear to me in the last 24 hours that the Greek savings, asset sales and tax increases brew is more trouble than huble-bubble: and without massive stimulus centred on the currency value, the country faces a future rapidly descending from dim to total darkness.

Bank of Italy Governor Mario Draghi warned again yesterday that further delay to Italy’s austerity plan and reforms “risks worsening the euro zone’s debt crisis”, possibly the understatement of the new decade thus far. It could well be that Draghi will soon find himself as both head of the ECB (he takes over from Trichet in November) and the national banking chief of an insolvent EU member  state.

I do not exaggerate when I say that this entirely Machiavellian domestic political gesture from Angela Merkel is the beginning of the end for the EU as we know it. Yesterday Der Spiegel reported that the Chancellor is looking at a ‘new eurozone Treaty’. As that isn’t going to fly, it looks to me like Berlin has decided on a new European grouping of creditor nations. But who is that slimmed-down unit going to sell to?

None of it makes sense. But then, it never did. The bottom line is that national considerations have triumphed over a Superstate project…on the issue of money. And this was always how The Slog saw the end coming.