Merkel, Sarkozy, and Monti agree to shut up about the ECB
Eurointeligence Comment and AnalysisThe most urgent challenge is the stabilization of interest rates on government bonds at a level below the rate of economic growth. This is a task for EU economic policy . For this, the European Financial Stability Facility (EFSF) should be transformed into the European Monetary Fund.
The contours of a strategy became apparent yesterday, when Angela Merkel, Nicolas Sarkozy, and Mario Monti met in Strasbourg where they sent out two messages: they will shut up about the ECB (whilst hoping that the ECB itself will offer a backstop voluntarily), and in turn focus on creating ultra-tough fiscal Treaty changes.
The financial markets understand the strategy, but remain sceptical, and global fund managers yesterday continued to withdrew funds from the eurozone as a whole – as evidenced by the fall in the euro to $1.33. A firm ECB spread guarantee would almost certainly stabilise bond prices, and surely bring some funding back to the eurozone, but the ECB can at most give a time-limited commitment, which means that markets will immediately focus on the post-ECB regime. This means the eurozone still needs a credible and intelligent political agreement on December 9 that must go significant beyond the German treaty change proposals that focus solely on fiscal discipline.
As reported by the FT, Mario Monti was alluding to one important aspect, which is what will happen if the recession is worse than feared? Monti is well aware that the Italian consolidation policies plus the rise in long-term interest rates will cause a very steep fall in Italian growth in 2012, as a result of which Italy, along with everyone else in southern Europe, will miss all policy targets. Investors want to understand primarily how the eurozone returns to growth as a pre-condition for debt sustainability. A crude balanced budget rule is not going to be a sufficient answer.
El Pais has more details, include Merkel firm rejection of Eurobonds, in contrast to Monti’s statement that a fiscal union is necessary, and that Eurobonds are desirable in the long run.
And Reuters reports that the Dutch have changed their position and now want the ECB to become more active in crisis resolution. (It is interesting to see what widening spreads and a domestic credit crunch can do to focus minds. )
German and French papers diverge on the interpretation of the Strasburg summit
The French and the German press disagree how to interpret the summit meeting of Angela Merkel, Nicolas Sarkozy and Mario Monti in Strasburg. Financial Times Deutschland thinks the agreement to shut up and to stop publicly pressuring the ECB into a more active role in the crisis may create the conditions for the ECB to play that role. Should Sarkozy at the summit December 9 agree to treaty changes and a significantly tighter fiscal union Merkel may in turn agree to Eurobonds. This may then create the right conditions for the ECB to provide some sort of bridging finance for euro governments until fiscal union and the Eurobonds are in place. Le Monde’s Arnaud Leparmentier, however, sees the Strasburg meeting as a failure for Sarkozy. He quotes an Elysée advisor saying: “Nothing is done, we are far away from any agreement.” In order to compensate for that failure, Sarkozy will now give a big speech on Europe next Thursday, Leparmentier writes.
Fear of a „German Europe“ resurges in the French elite
The fear of a German Europe resurges within the French political class, Le Monde reports. “The Germans dominate everything”, the paper quotes an anonymous heavyweight within the government. “We are just waiting for their decisions without having any influence on it.” Francois Mitterrand’s former advisor Jacques Attali recalls that Germany has led Europe into two suicides with two wars in the past century. “Today once again, Germany holds the arm of collective suicide in its hands”, Attali says. If Germany refuses the rescue of the eurozone, “there will be a catastrophe”. The former Socialist foreign minister Hubert Védrine warns: “The future government of the eurozone must not Germano-German and imposed on countries that are being held hostage by the markets.” The articles also says the French foreign ministry is worried because it sees Germany coldly promoting its national agenda. For Paris, the challenge is to bring Germany back to “post reunification wisdom”. Under the leadership of Helmut Kohl the country understood it is not in its best interest to push too brutally for its national interest because that would provoke an alliance of all other Europeans against Germany. “Today Germany thinks it is in its interest to be very tough on its doctrine and to impose itself as the only leader in Europe”, the paper quotes a French minister. “But it will not be able to sustain this position because it creates too much Germanophobia.”
Incidentally Lefigaro.fr has on online poll where it asks its readers “Has Germany taken too much power in Europe?”. Out of the roughly 12.000 respondents, 51% think yes while 49% did not think so.
Fitch downgrades Portugal’s rating to junk
Fitch downgraded Portugal’s credit rating to junk status on Thursday, citing large fiscal imbalances, high debts and the risks to its EU-mandated austerity program for a worsening economic outlook, Reuters reports. Fitch said a deepening recession makes it “much more challenging” for the government to cut the budget deficit but it still expects fiscal goals to be met both this year and next. State-owned “enterprise sector is another key source of fiscal risk” and has caused a number of upward revisions to the country’s debt and budget deficit figures this year. The government has said there was an unexpected fiscal shortfall of about €3bn this year. Portugal’s 10-year bond prices plunged, sending yields surging more than 100bp to 13.85% — the second highest level in the euro zone after Greece. The spread to German Bunds also rose more than 100bp to 1,168.
IMF welcomed Samaras letter
The IMF welcomed the letter from New Democracy leader Antonis Samaras , Kathimerini reports. The IMF issued a statement welcoming ND’ s support for the key objectives and policies of Greece’s economic reform programme, which was agreed in Brussels on October 26. The IMF also welcomed ND’s commitment to “ensuring that any changes to policies that it might suggest will be consistent with the basic framework of the program.” This statement was interpreted by sources in ND as a step toward the adoption of alternative policies that Samaras has been promoting. They expressed satisfaction even though a final decision is not expected until a eurogroup summit in Brussels on Tuesday. Lucas Papademos said he is optimistic about the outcome.
PSI focus on next troika meeting mid-December
The new private sector involvement (PSI+) plan will be the focus of the troika visit to Athens next month as well as measures for 2012, Kathimerini reports. The heads of the creditors’ mission to Greece are expected to arrive on December 12, with the first round of discussions due to be completed by December 18. The main representatives’ visit will start four days after the date that Parliament is to vote on the 2012 budget. Also at the table is the preparation of the next talks in January about the completion of the new loan agreement and the new memorandum for the second bailout.
France proposes Benoit Coeuré as to succeed to Lorenzo Bini Smaghi at the ECB board
Sarkozy last night decided to nominate Benoit Coeuré as the successor to Lorenzo Bini Smaghi in the ECB board, Le Figaro and Les Echos report. The president’s decision is a victory for the finance ministry where Coeuré was the deputy head of treasury over the Banque de France which wanted deputy Governor Jean-Pierre Landau to get the job. Coeuré who speaks Japanese and who is a highly regarded academic economist is considered to be left of the centre and close to former IMF MD and former French finance minister Dominque Strauss-Kahn in his economic thinking. Born in 1969, he will be the youngest board member. In a flagrant violation of the ECB’s independence the Italian board member Bini Smaghi was mobbed out of the board by Sarkozy who considered it was unacceptable to have two Italians (Bini Smaghi and Mario Draghi) and no French person on the board after Jean-Claude Trichet had left. Bini Smaghi will step down at the end of the year to go to Harvard.
Le Monde says the euro crisis is Germany’s and France’s shared fault
In a non-signed front page editorial, Le Monde accuses Germany and France to share the responsibility for the current euro crisis. “In Washington, the Federale Reserve and in London the Bank of England play the role of lender of last resort. They intervene directly on the market to avoid that the cost of the public debt does not get prohibitive. Not so the European Central Bank (ECB). Its status which is the mirror of the inflexible German monetary orthodoxy prohibit this type of intervention”, the paper writes. Le Monde then argues that in other countries there is a central economic and budgetary authority. “Not so in the eurozone”, the paper complains. “What is blocking this, is the sovereignist culture in France: the genetic resistance in Paris at everything that looks like the delegation of power in favour of a community institution which would be tasked to harmonize the budgetary policies and which could impose sanctions.”
Spreads, Forex, and ZC Swaps
What is interesting is that spreads move sideways, while bund yields rise. This, plus the slide in the euro suggest global money flows out of the whole of the eurozone – no intra-eurozone movements.
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