Unless somebody steps in to stop Berlin, we are all dead
It is perhaps a reflection of the German psyche that ‘What time is it?’ in German means – literally – how late is it? It has always seemed to me that the culture’s obsession with tidiness, punctuality and ‘being on time’ dictated that this is how Germans would think of ‘the time’. Thus indeed does Das MerkeSchäuble plough inexorably forward towards its apparent goal of total(itarian) eurozone discipline, so as to calm the markets. As The Slog posted yesterday, this isn’t really what the markets want; but for Berlin, the strategy has become a kind of Long March that must continue until it has alles in Ordnung.
Today, however, I would much rather pose the literal question: how late is it? Are we past the point where the German Government could turn back, and the eurozone thus be saved? The Telegraph’s Jeremy Warner yesterday gave up on Berlin and declared Gotterdammerung to be nigh. I have to say, I’ve never rated Mr Warner: he seems to me to have all the right technical terms, but no real insights or answers. Ambrose Evans-Pritchard, by contrast, has been doom-laden about the euro for as long as The Slog. And like me, he thinks it will need a major intervention of some kind to knock the German tanks off-course.
That’s what I was suggesting yesterday, but the comment thread response – almost entirely negative on the subject of British intervention armed with a new idea – told me what I already suspected: that there is no mood in the UK to help the eurozone, in return for bringing real reform to the table. It comes back to what I wrote some months back: the EU’s problem is that nobody loves it. At best tolerated and often ignored, for Southern Europe it had been the means to an end. The end is now in sight, but not quite in the way the ClubMeds intended.
So assuming no British ‘invasion’, who else might land a punch on the Wehrmacht? Certainly not the French: President Sarkozy – still grinning, but the more inane his grin, the more sad is the figure he cuts – is rapidly turning into a German Shepherd: obeying his mistress, and helping herd the other 15 sheep into the fold. Yesterday – to my initial surprise – he publicly recanted on the subject of harassing the ECB….having done the same about the EFSF a month earlier. But then a good Parisian source told me that Sarko now has his eyes on the IMF booty. As the boss is his former Economics Minister Christine Lagarde, this shouldn’t really surprise one at all.
Without German help now, France’s AAA is a goner. With a determined effort including UK and US help, Sarkozy could’ve won the ECB battle: but Camerlot isn’t interested (I now learn, having asked a senior citizen of it) and the US has put all its money on Das MerkeSchäuble. Geithner may now be regretting that decision, but the die seems to be cast.
The other factor – ex-Goldman cutie Mario Draghi, boss of the ECB – is that the Italian Stallion has asserted himself very strongly….so the chance of exploiting the confusion of changeover has also passed. As Chancellor Merkel both knows and rates signor Draghi very highly, she has backed his firm stand against Central Bank rape to the hilt. While I personally support this move, I think it somewhat specious of SuperMario to demand action from the politicians: they are going to need money to effect any action, and to date the bazooka remains empty. My scheme for an expanded EU eurobond therefore remains, whatever people think of it, a solution. I’d prefer structured debt forgiveness, but given the species is mad, there are two chances of that happening.
Nor is there support for the Slogobond from ECB Executive Board member Jose Manuel Gonzalez-Paramo. He told a conference in Oxford yesterday (what was he doing there, we wonder) that, “at this point in time [eurobonds] would not be commensurate with the degree of integration in the euro area…If you have a euro bond without a common budget, you are offering an easy way out for countries…[we will need] more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU”.
You see, I know I’m on my own re this one, but I think there is obvious sleight of hand here. G-P says ‘common budget’ in one sentence and ‘transfer of sovereignty’ in the next. The idea that they are mutually dependent (expressed time and again in yesterday’s Slog-threads) is absolute bollocks. UK local authorities, US states and even regional Federal Banks borrow money on their own account with no Sovereign guarantor at all…..hence half the US States being bankrupt as I write. When New York got into deep waters in the 1970s and turned to the White House for money, Reagan said “No”. The sky did not fall in.
All institutional lending is a risk, and nowhere near all of it is guaranteed by a Sovereign State. A common EU budget with one ‘sovereign’ Central Bank issuing bonds on behalf of all members is entirely possible. It is of course a moot point as to how many EU members would be prepared to subdue their own fiscal sovereignty in favour of Brussels/Berlin, but all the eurozone members are heading for that ending anyway.
However, this descent into a mood of negativity about anything bold now stretches, I think, from London to Ljubljana. Worse still, the sight of bigger and bigger bond yields alongside bigger and bigger cracks in the edifice is so obvious, a sense of doom is infecting everything. Hungary’s bonds having been reduced to junk by Moody’s, the government there has had to swallow its pride and call in the IMF. But the IMF (while due to get more funds, some of them British) is still hopelessly undercapitalised.
Meanwhile, what of the fabled bazooka? Alas, it is shrinking before it even inflated: it is a limp thing that never achieved tumescence, a small weapon that now droops in the cold light of reality. The yield spikes in ClubMed since the non-idea was hatched have forced the European Financial Stability Facility (EFSF) to sweeten the deal offered to investors. That makes it far more expensive to run, which will in turn reduce the number of bonds the insurance would cover….thus rendering the ‘fund’ even less attractive than it was before.
Klaus Regling, head of the EFSF, now says that overcoming investor concerns with improved guarantees will dramatically reduce the leverage. Yesterday, senior eurozone officials said even this lower target may be well-nigh impossible to reach.
Sources in Brussels are equally pessimistic about the prospects of a second source of leverage – the so-called ‘Spiv’ – designed to attract Bric investors. The truth is that Beijing and Sao Paulo said, “In your dreams, Chuck”. And without those two, it’s a dead duck. Well, you read it here first.
So: can the markets force Berlin to buy into the idea of an overall guarantor before they themselves start falling over? I very much doubt it: as I posted earlier this week, serious (euro)bank collapses will now catapult the brown solids over towards the US, and swamp the UK’s banking system at a stroke. My best guess is that Merkel will start to wobble at about three seconds to midnight…..but then one second later, the collapses will begin. It’s what the Pentagon used to call MAD – Mutually Assured Destruction. And it now looks like an odds-on bet.
Related: Cameron’s last big chance to make the UK a player again in Europe
The Slog 