Big ceremony for M. Trichet today. He's leaving at the end of the month after a very effective stint as the head of the ECB and having been a powerful spokesman for central bank orthadoxy. He is, and has alway been a pretty sharp guy.
So it came as a bit of a surprise to me that he dropped the bombshell of the day and took off into regions where one would never find an angel. Jean-Claude today proposed that the ECB adopt a common fiscal policy with a finance minister for all member states. It was a surprise not because it isn't a good idea and would cure the Union's greatest shortcomings: A common monetary policy in search of a common fiscal policy which in the past few years (from the get-go, actually) has shown what mischief THAT could cause, but because it is an idea that has absolutely no chance of going anywhere. The other surprise is that the talking heads actually gave it a lot of play like it was the first time they had ever heard of such a thing. Given the state of financial journalism these days that may actually be the case.
M. Trichet knows all this of course so one must ask why not just retire gracefully and pray for his successor? I'd like to say I have the answer but alas, I have but a suspicion. For years, M. Trichet has been sounding the alarm and this is his one, last shot. He's worried, he is very worried, not only for the EU but for the global financial order. It can be said that we are in even worse shape that Europe: we have a non-existant fiscal policy and a monetary policy that lurches from one economic theory to another, grounded firmly in thin air. M. Trichet's advice is painful to hear as it is clearly the agonized cry of a greatly troubled man. We cannot say we haven't been warned.
The interesting thing is the German reaction. We all seem to assume that there are only two ways forward: fiscal union, or the desolution of the Euro. Germany seems to think we can continue to muddle-through:
ReplyDelete“I’d like to say here and now that Germany is aware of the importance of the euro and Germany is committed to the euro,” said Dr Merkel in a keynote address in Singapore. ... However, she said the euro zone at present lacked “established mechanisms to resolve conflicts of interest between member states”.
“National egos . . . have to step into the background for good. If that doesn’t succeed, then it comes at a cost to all member states long-term.”
......
"As an idea for the day after tomorrow, it may have some merit," Steffen Seibert, the spokesman for German Chancellor Angela Merkel, said Friday at a regular government press conference. "But that nevertheless is a very long-term project and certainly not the subject of government considerations in this phase."
This sounds to me like Trichet stating the obvious and inevitable (but unspoken truth), and perhaps Merkel's team starting the walk to see how much sovereignty she can get the electorate to cede in order to ultimately socialize the debt. Unfortunately, this is probably too late - by August we'll all realize she's lost the Bundestag.
Here’s a downside scenario for you:
ReplyDeleteJune 20: EU Finance ministers meet, and agree on the same things they always say “committed to euro, Greece needs fiscal discipline, blah blah)
Mid-July: amidst the need to refinance 6-month bills, with rates through the roof, EU announces a “kick-the-can” further bailout of Greece. IMF announces that Greece has not met the conditions required for the next tranche (or maybe IMF agrees to release funds, but some BRICs make noises about pulling out of the IMF). Ireland immediately begins to renegotiate its deal. Landesbanks face funding pressures. EU stress tests released, and are (surprise!) moderately credible – show capital holes at several banks (German, French, Italian) even without “worst-case” assumptions. BAC, C and WFC get downgraded by Moody's and placed on watch by Fitch; BAC discloses further mortgage risk on its books; further subpoenas issued to GS.
August: with senior traders on vacation, market comes to realization that Merkel will lose the September Bundestag elections (to an even more conservative faction) - hopes for Euro integration collapse - realization that default is Greece, Irland, Portugal's only way out. Hints of recession in Europe drive Spanish CDS wider. Technical default by either Greece (or the US!)