Forget Berlusconi, only Germany can save the euro now

[Herbalist Dr MziziMkavu]

Berlusconi: irrelevant

It’s funny. All the pundits keep saying that the eurozone crisis is down to a lack of leadership.
Yet, every time Europe loses another leader, markets react as though it’s the best news they’ve had all year.

First, Greece’s PM pledged to step down for the good of his country. Now Silvio Berlusconi has promised to do the same.
Note that word ‘promised’. To look at the front pages this morning, you’d think the Italian prime minister had already packed his bags and headed off into the sunset. But Berlusconi has said he will step down after parliament “approves a budget law that includes reforms demanded by Europe”, says Reuters.

That’s not to say that he won’t go (although I’d be surprised if he didn’t try to wrangle some sort of perpetual legal immunity out of parliament before he goes). But to imagine that this represents a turning point in the euro crisis would be ridiculously optimistic. “Even when Berlusconi goes, there is no guarantee that reforms to cut [Italy’s] debt mountain and boost growth will be quickly implemented, and relief on markets may not last long.”

What’s really incredible is that there was any relief on markets at all. We’ve said this before (and we said it well before this crisis kicked off), but the eurozone is massively flawed. They have roped together a group of countries with entirely different cultures, priorities and economies, and basically assumed that they are all German. They’re not.

Source:Forget Berlusconi, only Germany can save the euro now - MoneyWeek

 

[Herbalist Dr MziziMkavu]

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The eurozone is not greater Germany

Once upon a time, Italy or Greece would have resolved these problems the same way as Britain and America are doing now. They’d resort to a bit of inflation and devaluation. Their economies would remain sluggish and inefficient and corrupt, and enough of the population would be content with that for it to continue.

The trouble is, that’s not the German way. And locked in the euro, devaluation is not an option. So they are faced with forced restructuring. Although that might just be better for the economy in the long run, it’s very painful just now. And crucially, it feels like it’s a foreign solution being imposed by a foreign power.

It’s this conflict between national and continental interests that lies at the heart of the European problem. Everyone bought into the good times – what are now deemed the ‘peripheral’ countries saw the development grants from Europe, the low interest rates, the property booms that buying into the European project brought them.

But nobody thought about what they were signing away – ownership of their currency - and what that would mean in the hard times. So now they feel cheated.
To grasp how sensitive this issue is, just look at Greece. The Greeks are still trying to agree on a ‘unity’ government who will try to push the second bail-out through parliament before elections in February. Technically speaking, everyone is on board with this now that Papandreou is gone.

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But yesterday, opposition leader Antonis Samaras refused to give the rest of the eurozone a written commitment to austerity measures. “There is such a thing as national dignity,” he said. He argued that he has already agreed that the measures need to be passed, so there’s no need for him to sign a bit of paper.
You can see his point. The Greeks already feel like they’re being put over a barrel. He needs to save face. His country-folk need to save face. It’s a diplomatic minefield. And at some point, if they’re pushed too hard, the Greeks will turn around and tell the rest where to stick the euro.

Germany doesn’t want to bail out the rest of Europe either

There really is only one easy way out of this. Germany has to agree to subsidise the rest of Europe. Either it does this via the issue of ‘eurobonds’, or it does this by allowing the European Central Bank (ECB) to print money, and accept the inflation risk that entails.
This would be a relatively painless, face-saving manoeuvre for all countries involved. It still wouldn’t solve the euro area’s fundamental problems and would store up huge trouble for the future. But it would prevent the euro from splintering now.
And the ironic thing is that if Germany was Greece, or Italy, or even Britain, it would probably happily opt for the money-printing option. But Germany isn’t any of those countries – it’s Germany. And that’s why the idea of printing money, even at this apparently desperate juncture, is such anathema.

Yesterday, Jens Weidmann, who is an ECB council member and head of Germany’s Bundesbank, came out strongly against money-printing by the ECB.

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” he said. The ban on the ECB doing this “is one of the most important achievements in central banking… specifically for Germany, it also a key lesson from the experience of hyperinflation after World War I.”

As we mentioned in Monday’s Money Morning, Germany may have to change its mind if the ECB goes bust. But for now, the market’s faith that a solution to the eurozone crisis will be found soon, looks badly misplaced.
And in case you’re wondering why stock markets still seem to be quite sanguine about everything, bear in mind that it wasn’t

until Lehman Brothers collapsed in late-2008 that they really reacted to the global financial crisis. By then, the US housing market was collapsing, and Bear Stearns and Northern Rock had already gone bust.
Efficient? Quick on the uptake? I don’t think so. Bond investors – who are now pricing in a bail-out for Italy are generally viewed as the ‘smart’ money, and you can see why.
• For more, see our sovereign bond charts page.