European Central Bank Chief Economist Juergen Stark early last month told Italian media, in reference to the Greek economic situation, that “the markets are deluding themselves when they think at a certain point the other member states will put their hands on their pockets to save Greece.”
The world then finally started zooming in on the “strange” Greek situation inside the euro zone with its “strange” rules — and the fact that because Greece hadn’t respected these rules since it had entered the euro zone in 2001, something had to give.
There are indications that Germany could make the sacrifice Brussels is asking it to make.
Believe me, this is not a good omen for the euro.
Since World War II, Germany had always protected its fiscal and monetary policy with all the means it had, with one supreme goal: “Never another 1923!”
It’s like the U.S. Federal Reserve vowing: “No more 1930s!”
Thanks to Germany’s continuous fiscal and monetary hard line, the German mark had become the undisputed status of the “anchor currency” for the European Exchange Rate Mechanism, or ERM, as well for the euro and the creation of the European Central Bank.
It’s worth to remember that Germany didn’t change its hard line in 1993 when it sacrificed its ERM partners for maintaining its “credibility.”
Investors now look at the euro like they once did the German mark.
The euro, since it was formally introduced to world financial markets as an accounting currency on Jan. 1, 1999 — when it replaced the former European Currency Unit (ECU), the second reserve currency and the second most traded currency in the world after the U.S. dollar — is also considered an “anchor currency.”
But, times could be changing quickly.
It looks like Germany is failing to stick to its decades-old austere message.
And there is no doubt in my mind that the German voters won’t wait long before openly criticizing Germany’s failure.
But that’s another question.
When we look at the developing situation from a “euro perspective,” then we must admit that we could be at the brink of a “weakening” process that should lead to a significant reassessment of how we look at the euro.
During the past decade, the euro has taken on the role of the world’s second reserve currency after the U.S. dollar — a role it took over from the German mark.
Interesting in this context is that during recent days, we saw yields on German government bonds rising hereby narrowing the 10-year Greek/German bond spread.
Yes, they are closing in on “bad company.”
That said, we still have to wait for details on how and what kind of “firewall” will be built around Greece’s virus, as the EU will try to prevent the Greek crisis from turning into a euro zone-wide fiasco.
Now, if Germany is to effectively provide a guarantee to help Greece, then there is no doubt it will also come under pressure to provide similar supports for Portugal, Spain and beyond.
Bottom line: Investors should keep their calm and certainly not believe in fairy tales.
With what we and the European Commission know today, there is no reason to believe Greece’s promises as well as the official statistical numbers they give to Eurostat, the European Statistical System.
Keep in mind that Greece in 2003 refused Eurostat inspectors, mandated by the European Commission, to check their numbers.
The simple question is: “Why and what did they have to hide?”
In the short term, we might see the euro benefiting from some kind a relief rally, although I have serious doubts about this.
On the positive side, we could say that if the cost of preserving politically the European Union is a weaker euro, then over time, maybe this isn’t such a high cost.
The question is, “Will everybody be happy to do this?”
Well, at least most of the French will be happy.
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