Tags: parisis | Merkel | Sarkozy | euro

Merkel, Sarkozy Offer Little Help for Big Mess

Thursday, 18 August 2011 07:06 AM Current | Bio | Archive

German Chancellor Angela Merkel and French President Nicolas Sarkozy really only came up with “big words, but little deeds” for the eurozone crisis at their news conference.

For those who still had doubts about it, it has become clear that Germany and France lack any real interest for doing anything other than “protecting their own credibility.” They therefore find themselves boxed-in whereby they are extremely limited to offer anything substantial or “out of the box” for helping their “weak” and “credibility lacking” non-core eurozone partners, who can except even more austerity whether they like it or not.

France and Germany now have rejected the idea of Eurobonds. They also have rejected for the time being an increase in the size of the European Financial Stability Facility (EFSF), which is aimed at preserving financial stability in Europe by providing financial assistance to eurozone states in economic difficulty. And both France and Germany are instead pushing hard the idea of balanced budgets, which translates in even tighter fiscal conditions for the weak periphery eurozone members at exactly the same moment that monetary conditions are tightening.

In my opinion, unfortunately very little has shifted the possible outcomes to the current eurozone crisis.

Nothing indicates or gives serious hope the eurozone is definitively on its way to becoming a real “transfer union.”

Germany and, possibly the Netherlands and some other northern European states, experience more and more diminishing domestic political support for providing aid to southern Europe, which is a situation that could push them to consider leaving the euro if it continues under its actual structure.

In this context, just released opinion polls in Germany, the Netherlands and even France show further growing political dissatisfaction with the euro and practices applied by the financial authorities in the eurozone. Really telling, if not alarming, are the Netherlands where a “Maurice De Hond” poll published on Sunday showed that 60 percent of those surveyed want the Netherlands to stop lending money to other eurozone countries. A total of 54 percent want Greece and other peripheral countries thrown out of the eurozone rather than rescued. A total of 48 percent said the euro's negatives outweighed its benefits.

A separate poll, commissioned by Dutch newspaper “Algemeen Dagbled” finds that 48 percent of those questioned want to leave the euro and return to the Dutch guilder (NLG).

If history could be of any help for understanding what’s going on or what’s really brewing in Europe, it is important for investors to remember that in the 1990s it wasn’t Germany that left the European Exchange Rate Mechanism.

The ERM was a system introduced by the European Community in March 1979, as part of the European Monetary System (EMS) that aimed reducing exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of a single currency, the euro, but, it was in fact Germany that imposed such kind of circumstances that forced other members to leave the European Exchange Rate Mechanism system in 1992 and 1993 with its hard-line stance on monetary policy matters that were designed to protect Germany’s credibility that obliged nations to float (devalue against the German mark) their currencies or leave the ERM all together.

Yes, it was the United Kingdom, or better said the British pound, that left the ERM on April 16, 1992, after it had joined the ERM in October 1990. At the end of July 1993 it was also agreed on to a radical widening of the ERM bands that, to all intents and purposes, allowed the ERM currencies to float and move lower compared to the German mark. Interestingly, at that time, France's former foreign minister, Roland Dumas, blamed the Anglo-Saxons for the crisis. He said they were bent on undermining moves toward closer European unity…

Finally, as I have said here before, again we see Europe facing huge difficulties recognizing the faults in the current eurozone structure that has an inappropriate monetary policy for non-core Europe, which still remains at the heart of the crisis.

Things could be a lot better for everybody if Greece together with the other weak peripheral eurozone members would accept the fact that things will never get better and/or that their banking system will be severely compromised if they remain within the current structure and therefore decide to leave the euro.

Yes, it could be 1992-1993 all over again. Why not?

The weaker eurozone faces rather simple but extremely unpleasant choices: Either accept the harsh economic conditions that the Merkel-Sarkozy press conference “implies” will be prevalent or decide that it is simply too much of a burden. I wouldn’t bet on a eurozone miracle. Of course, I could be wrong…

I really don’t know what could be the catalyst that accelerates the various possible processes. Whenever it occurs, it will have huge consequences for all investors everywhere on the globe… that’s for sure. Yes, the more things change, the more they stay the same. This time won’t be different.

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German Chancellor Angela Merkel and French President Nicolas Sarkozy really only came up with big words, but little deeds for the eurozone crisis at their news conference. For those who still had doubts about it, it has become clear that Germany and France lack any real...
Thursday, 18 August 2011 07:06 AM
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