Euro Hysteria At A Fever Pitch

Monday was so chock-full with at times bewildering news items that one hardly knows where to begin. We decided therefore to focus on what one might call a case of official hysterics. The increasingly dubious mental state of the personae dramatis indicates that it would be reasonable to expect their unhinged mental disposition to influence  decision making at the highest level.

Before we delve into the news items that piqued our interest, readers should stop to consider something. People like German chancellor Angela Merkel or French president Nicolas Sarkozy have had an extremely stressful year. Rushing from one 'emergency summit' to the next, trying to forge a consensus among a horde of squabbling bureaucrats and politicians from 17 countries, trying to defend their decisions against the criticisms of the whole world, trying to keep their own political base in line, and so forth. And they're doing all this while being quite uncertain as to which course of action they should actually support. There is a plethora of conflicting advice after all. Bundesbank economists want Mrs. Merkel to be stern and conservative. The Keynesians want her to agree to opening the monetary floodgates. She herself is not an economist, but has studied physics. In all likelihood her view of economics is colored by that, a highly unfortunate circumstance.

We recently heard it mentioned that Merkel doesn't get much more than four to five hours of sleep per day, and since she isn't getting any younger,  this obviously can not be sufficient. Mental and physical exhaustion are undoubtedly setting in.

Consequently, one gets the feeling that the degree of hysteria at all levels of the EU is palpably increasing. Consider for instance the following Reuters report concerning a recent speech by Mrs. Merkel. The title actually almost says it all: “Europe could be in worst hour since WW2”. Really? A little bit of economic and currency turmoil is comparable to the devastation and despair of Word War II? Aren't we exaggerating a little bit here?

“German Chancellor Angela Merkel caught the mood of crisis with a stark warning Monday that Europe could be living through its "toughest hour since World War Two." She told her CDU party she feared Europe would fail if the euro failed and vowed to do anything to stop this from happening.”

She's going to 'do anything' to keep the euro from failing? That can't be true, can it? As far as we are aware the current German stance is that certain things won't be done under any circumstances.

Meanwhile, at a congress of her party CDU, it was decided to push for an amendment of the European treaties to the effect that states would be able to leave the euro area – something that hitherto wasn't legally possible. Concurrently, Merkel's party is pushing for more centralization, namely the dreaded 'FU'. According to Bloomberg:

“German Chancellor Angela Merkel’s Christian Democratic Union party voted to allow euro states to quit the currency area, endorsing the prospect of a move not permitted under euro rules.

The resolution, which requires the assent of Merkel’s two coalition partners before becoming policy, is part of Merkel’s push for closer political ties and tighter budget rules in the European Union, with euro countries setting the pace. The drive is her answer to the debt crisis that began in Greece in 2009 and last week toppled governments in Athens and Rome.

“We’re not throwing anybody out,” Finance Minister Wolfgang Schaeuble said in an interview with broadcaster Phoenix from the CDU national congress in Leipzig today. “But if a country can’t carry the burden or doesn’t want to carry the burden, and the Greek people have to carry a heavy load, then we have to respect the country’s decision.”


(emphasis added)

So far, so good. No-one should be forced to live in the euro straightjacket if they don't want to, although we can imagine that most of Greece's citizens are none too happy about the prospect of returning to the drachma. One of the unintended consequences of adopting this treaty change will no doubt be to set off an even bigger run at the Greek banks, creating a self-fulfilling prophecy type situation in the end.

To our readers from Greece we would say: better panic before everybody else does. Don't dawdle, best buy gold as fast as you can and definitely do not keep it at a bank. The danger is great that one of these days there will be a government-imposed 'bank holiday', to be followed by restrictions on how much money one can withdraw or transfer, and a forced reconversion of all bank deposits into the old currency. Safe deposit boxes may become the subject of searches by an increasingly desperate government looking for sources of revenue. If you can't explain the provenance of their content in detail, there's going to be confiscation. If you think your government wouldn't do that, all we can say to that is: please don't be naïve. Government promises aren't worth squat, especially not during times of 'emergency'. In fact, governments routinely lie as a matter of course. Please study the case of Argentina's default closely. In the end, the citizenry was robbed of its deposits and savings in a confiscatory deflation in order to keep the banks afloat.

Anyway, amending the euro-land rules to allow a nation to exit is not a bad idea as such. However, then it really gets worrisome. In order to avoid going down in history as the 'people who sank the euro', Mrs. Merkel and her colleagues are pushing for the elimination of subsidiarity in the EU. Luckily the UK is strongly opposed to these moves, but it is doubtful whether this opposition will be enough to keep the EU from traveling down the road to centralization:


“Merkel’s drive for closer union sets up a potential tussle with fellow European leaders at a summit on Dec. 9 that is due to discuss an overhaul of the EU’s guiding treaty to bolster the euro. Prime Minister David Cameron has pledged a U.K. ballot on any changes to EU rules that mean a shift in power to Brussels. Cameron is due in Berlin for talks with Merkel on Nov. 18.

The euro states have squabbles of their own, which threaten to derail plans to speed implementation of a permanent bailout fund next year, one year earlier than the original July 2013 date.

“Some things speak in favor of trying to speed it up, but at the moment the situation isn’t easy,” Schaeuble said. Agreement on the structural changes needed for “fiscal union” is the priority.

CDU delegates in Leipzig backed a motion that included a clause permitting euro exits without exclusion from the EU. Once government policy, Germany would still need to persuade its EU partners to approve changes to the bloc’s guiding treaty to allow a country to leave the euro.

With Germany pushing for treaty changes to move toward closer union, “we have to realistically expect that at the moment we have to get something quickly for the 17” euro members, Schaeuble told reporters. If all 27 EU members “want it, then gladly.”


Merkel, in an hour-long speech to more than 1,000 CDU delegates, said the task at hand “is to complete the economic and currency union in Europe and, step by step, create a political union.” The goal is “a breakthrough to a new Europe,” she said. At the same time, she repeated her rejection of joint euro bonds.

Merkel’s message is “a warm-up for the big quantum leap” toward a two-track Europe, Carsten Brzeski, an economist at ING Group in Brussels, said by phone. “If you wait for the Brits, you’re going to spend a lot of time at the station and the train will never come. If you want to do the quantum leap, you can only do it with the euro zone.”

Good grief! Saints preserve us! The goal is “to complete the economic and currency union in Europe and, step by step, create a political union”?



The Outlook for ECB Policy


As we noted above, hysteria is evidently breaking out. Schaeuble wants to “get something done quickly” all of a sudden, no doubt because the stress is getting to him too. We also wish the crisis would abate, but rushing through steps toward  the creation of the European super-state must be rejected by anyone with an ounce of common sense. Speaking of Mr. Schäuble, we noticed an interesting comment he made at the same meeting regarding the ECB's SMP program:

German Finance Minister Wolfgang Schaeuble said Monday that the European Central Bank is not violating EU rules by buying government bonds of EMU member states on secondary markets.

Speaking at a convention of his center-right CDU in the eastern German town of Leipzig, Schaeuble reminded that the EU treaties do not allow the ECB to finance states directly.

However, the ECB's bond purchases on secondary markets are carried out by the central bank in full independence only to assume its responsibility for monetary policy, the minister explained. The central bank is aiming to reduce short-term volatility on bond markets, he said.”


(emphasis added)

It is noteworthy that he didn't mention the question of sterilization. If the ECB were to begin buying government bonds in the secondary market without sterilizing the purchases, then the above mentioned rule about it not being allowed to finance governments would almost amount to a distinction without a difference. It is of course clear that if the central bank were to buy bonds directly from governments, this would be even more inflationary than buying them in the secondary market (see our post on the mechanics of quantitative easing for details on this point).

However, if the ECB were to begin making unsterilized bond purchases, it would certainly serve to vastly increase the money supply and free up funds enabling the commercial banks to step up their financing of government debts in turn. So far the ECB's 'QE' type moves have been confined to the permanent monetization of so-called covered bonds, but this could conceivably change.

The people manning the ECB must after all be considered to be greatly interested in the survival of their own institution. They are constantly exposed to exhortations from all sides to jump into the breach as 'lender of last resort' and  step up their monetization efforts in 'unlimited fashion'. The idea  certainly has its supporters within the central bank as well. Although various members of the board continue to speak out against this course, this may well just be part of the ECB's PR strategy aimed at forcing recalcitrant fiscal offenders in the EU to adopt unpopular austerity measures. The ECB's recent gaming of the Italian bond market speaks for itself in this context.

It is also worth keeping in mind that Jürgen Stark, the conservative German board member and current chief economist of the ECB will be replaced by the socialist Jörg Asmussen, who is considered to be 'more pragmatic', which is to say, less principled and thus more likely to support interventionism. As the Economist reports:

“Earlier this year Jens Weidmann, chancellor Angela Merkel’s financial-markets adviser, was sent to Frankfurt to fill the hole at the head of the Bundesbank left by Axel Weber. Mr Weber too was known to oppose the ECB’s policy on sovereign-bond intervention, at that time on behalf of Greece.

Is Mr Asmussen likely to develop the same qualms? It is safe to assume that he is not taking the ECB job just so that another German can fall on his sword. Mr Asmussen became an important player at the finance ministry under a social-democrat (SPD) minister, Hans Eichel. He survived the SPD’s removal from government in 2009 because his technical pragmatism was valued. But it may be that he has more sympathy for the ECB’s bond-buying policy than his predecessors, as does today’s opposition SPD.”

We conclude from all of the above that Germany is about to take a big step forward toward erecting the very European socialist super-state that would have the EU's founders rotating in their graves.



German  socialist career bureaucrat Jörg Asmussen: will he support money printing by the ECB? Probably yes.

(Photo via picture alliance / dpa)





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