One thing Greek politicians have taught other European leaders: fear mongering for the purpose of extortion is the way to go. It might not work, and it might be counterproductive, and it might destroy confidence in the economy and give investors goose bumps and blow up markets, and it might cause spooked consumers to hold back on purchases and worried businesses to freeze hiring plans, thus exacerbating the situation, but it’s nevertheless the way to go.
Greek politicians learned it from Treasury Secretary Hank Paulson who'd walked into the Capitol in September 2008, threatening that the whole world would collapse if his demands weren’t met. Soon, they expertly issued a series of escalating threats to extort the maximum amount in bailout euros from the Troika. It didn’t work very well as the Greek economy continued to spiral out of control, and as the frustrated Troika halted bailout payments from time to time, and as tempers flared, and as the people in Greece became increasingly edgy. But it was the way to go. Then came Spain. And now Italian Prime Minister Mario Monti.
As always, timing is everything. And there was no better time than Thursday, the day before the meeting in Rome of the big four—Germany, France, Italy, and Spain—and a week before the European summit, which isn’t a run-of-the-mill summit, but the summit, the one that would have to save the Eurozone. And the world. Again.
Monti, the unelected technocrat who was supposed to be able to unite parliament, is losing support in Italy, which is mired in its fourth recession since 2001. His real estate tax is widely despised, though he’d picked up some brownie points in the foreign media as deficit fighter, and an imperceptible nod from German Chancellor Angela Merkel. And yields on Italy’s government bonds have spiked to levels where the resulting interest expense would eat Italy’s budget alive [Read.... Italy Trembling on the Brink].
If the summit next week doesn’t result in a grand plan to turn everything around, Monti said, the Eurozone would spiral into its political and economic demise. “There would be progressively greater speculative attacks on individual countries,” he said. And he mentioned Italy by name. A “large part of Europe” would suffocate under “very high interest rates” and would go into paralysis. The public would get frustrated with Europe. A vicious cycle would ensue: while the Eurozone would need greater integration to survive, the people, governments, and parliaments would “turn against that greater integration.” That process has already started, Monti said, “even in the Italian parliament, which has traditionally been pro-European and no longer is.”
Hence, no agreement by end of the summit next week, no Eurozone—though the breakup would be gradual. And he had a grand plan: more integration to where “markets are convinced” that the euro would be “indissoluble and irrevocable”; mechanisms to keep debt contagion from spreading (meaning massive and unlimited bailouts); a full-fledged banking union with unified supervision and European-wide deposit insurance; “new market-friendly policy mechanisms”; and the direct purchase of sovereign bonds that teetering member states could no longer bamboozle the markets into buying. Every item on his list would be funded by taxpayers in other countries, particularly in Germany. And so he also mentioned fiscal responsibility, to satisfy Germany.
That would be the “absolutely necessary” minimum to save the Eurozone. And it would have to be agreed to by next week—though he’d assured the rest of the anxious world less than a week ago that Italy wouldn’t even need a bailout.
But the fear-mongering didn’t sway the German Chancellor during the Rome meeting on Friday. In fact, she left early to fly to Poland to watch Germany’s soccer team demolish the Greeks—and the anti-Merkel triumvirate of Monti, Spanish Prime Minister Mariano Rajoy, and French President Francois Hollande could stew amongst themselves.
There was, however, a nugget of success that the triumvirate threw to the media: €130 billion would be dedicated to growth measures. A step away from Merkel’s austerity. Alas, it wouldn’t be new public money or additional public money, but the activation of private capital and a shuffling of funds within the existing EU budget. It was nothing.
And Merkel brushed off any hopes that the EFSF and ESM bailout funds could hand taxpayer money directly to the banks. Nein, Merkel said, the contracts clearly spell out that states are the partners, not banks. “It’s not that I don’t feel like it,” she said, “but the contracts aren’t made that way.”
Hollande again called for Eurobonds, like a child that doesn’t want to see reality; Germany’s refusal is nearly absolute, and it’s not just Merkel, but the population as a whole. Even the banking union that Merkel emphasized she’d be open to could not include any form of common liability; it could only have a common regulator, she said. And so, Monti’s threat has once again proven to be the way to go, though it didn’t work and might become counterproductive.
Meanwhile, Germany and Austria have plunged into public soul searching about the euro and the endlessly growing expense of maintaining it. Like so many things that appear useful, the euro has become dangerous. Read.... “The Euro Is Like a Knife in the Hands of a Child.”
George Dorgan, a macro-based fixed-income and currency portfolio manager based in Switzerland, writes that Germany won't, and can't, agree to most of the Eurozone bailout measures bandied about. Period. Regardless of what the FT and the Economist wish to believe. And hedge funds betting that Germany will pay in the end are wrong too. Read.... Eurobonds, Fiscal or Banking Union—They're All Pure Utopia.