How Germans view the latest Euro deal...
DID Germany give in to the Italians at last month's European summit? asks Sean Corrigan at the Cobden Centre.
The tenor of the press coverage in Germany is fairly one-sided in the interpretation that 'Madame Non' did in fact give in to an Italo-Hispanic threat of boycott. We were presented with the ludicrous spectacle of two inveterate starvelings making the threat that if they could not dine on caviar they would not accept carrots to a woman who was not all that keen on sharing any crumbs from her table (she was, after all, only cajoled into accepting the so-called Growth Pact which they were blocking out as a gambit to secure the two-thirds parliamentary majority needed in order to pass the ESM enabling legislation – a program which she and hers were also not that keen on in the first place!)
The editorials and op-eds were bad enough, with their talk of 'democratic deficits', 'witch-hunts', 'tearing up treaties before the ink is dry on them' and 'reaching into the German pocket', but some of the readers' comments went so far as to invoke images of the infamous 'Kohlruebenwinter' when the besieged German populace barely fended off starvation on a monotonous diet of root vegetables in 1917, as well as the even more emotive leitmotiv of betrayal, the 'Dolchstoss' – or stab in the back – by means of which the Allies overcame a supposedly undefeated Imperial Army a year later.
And yet it may not be entirely a piece of political slipperiness for the Chancellor's team to argue that nothing much actually has changed.
Several commentators have pointed out that there are, in fact, no new 'instruments', just as Frau Merkel promised. It remains the case, they contend, that the ESM has neither been extended, nor allowed to leverage itself up; that its use as a means of financing banks directly is subject both to the inevitably fraught process of first establishing a pan-European banking supervisor-cum-Resolution Trust (and one possibly equipped with a Scandinavian doctrine of managerial dismissal and stock and bondholder loss-sharing, to boot); that, in the meanwhile, if Spain needs to re-cap its banks, the overstretched Spanish budget will still have to bear the strain; that, theoretically at least, each and every emergency loan is supposed to be decided on a case-by-case basis by national legislatures on the typical EZ-weighted calculation – leaving the Bundestag with a final right of veto, should it ever screw its courage to the sticking place; that she can rely on the disgruntled Finns and Dutch also to block whatever they can; that the whole vexed issue of seniority of claims has not been precluded, merely finessed away by means of not insisting on an explicit declaration of what, much like the IMF, is likely to be an implicit priority, once implemented; and, finally, that the Grim Reaper may put away his scythe for now, since she has NOT in any fashion given way to the issue of joint Euro-Bonds.
Thus, as is so often the case in financial markets – for all their pretense at scientific objectivity in analysis – this largely comes to down to a matter of what its participants want to believe. If you are ready to scoff at German pusillanimity, or to despair at the cynicism of its leaders' political calculation, or to rejoice at the prospect of another dose of global Keynesianism – or simply to exult that, finally, risk assets can rise and you can look good for a few weeks – you will tend to believe that the once-forbidding Siegfried Line is now bedecked with newly-scrubbed Allied underwear.
If, conversely, you believe that additional debt is no solution for over-indebtedness; that the extreme time-preference of the venal place-holders who comprise the political class will never allow them to introduce much-needed reforms except under the most exigent outside pressures; that the deliberate ruination of a nation of savers and profit-makers is too high a penance to observe in order to absolve their opposites of their sins; if you are predisposed to a bearish outlook for assets which you suspect still bear the artificial premium attached to them by the past quadrennium's over-zealous interventionism, you will be eagerly reading between the lines for signs that the triumph of Monti, Rajoy, and Hollande has been an illusory one and that the sell-off may soon resume.
In any case, the next scene of the farce-cum-tragedy will take place in Karlsruhe on the 10th, when the German Constitutional Court will – somewhat unusually – take oral depositions from the pros and antis, as a preliminary to making a more considered judgment later.
As this all plays out, it should also be noted that all the past year's summitry and special operations have effectively reinforced the business of capital withdrawal and banking dis-integration across the 'natural frontiers' of the Rhine and the Alps. As the ECB balance sheet has doled out an extra €800+ billion in new credits, TARGET2 creditor-debtor balances have swollen by €590 billion (€390 billion v-a-v Germany alone) with M1 only adding around €210 billion, with half of that increment having taken place in Germany and two-thirds of it in the wider creditor group which includes the Netherlands, Finland, and Luxembourg.
Thus, German real M1 growth has accelerated smartly from 0.9% pa to 5.2% (the median rate of the past three decades), driven by a veritable explosion in the local monetary base. Across the combined Creditor-4 grouping, real M1 is rising at a rapid 5.7% annual rate while – alack and alas! – the same key measure in the rest of the Zone is deflating at 3.9% annualized.
Were we to write down debts, entitlements, subsidies, wages, and costs and free up balance sheets, capital means, and labor in the latter unfortunates at the same time that we allowed the extra monetary infusion to go about its accustomed work among the former blessèd quartet, it would eventually effect the necessary rebalancing – in classic Humean stock-flow terms – that the bloc so badly needs. Thus, our condemnation of the process should really confine itself to the observation that it is precisely those same necessary accompaniments that so much of the Latinate policy thrust is aimed at avoiding, at the direct expense of their unsullied northern neighbors.
While the combatants take a brief respite from the battle, we can instead entertain ourselves with the spectacle of Monsieur Oui – the new incumbent of the Elysée Palace – trying to keep his rash electoral promises to reverse the sweeping tide of 'neoliberalism' and to stimulate growth while simultaneously being forced to trim his budgetary outlays to the not inconsiderable tune of €40 billion. Bon chance, mon brave!
The soak-the-rich measures we can expect, in what will be a victory for blind ideology over both economic theory and empirical verification, will further poison what are already noisome waters for investment and capital formation. As such, this is a prospect which is already said to be impelling elevated numbers of the likely soakees to quit the nest, in a less sanguinary replay of the Revocation of the Edict of Nantes.
Ironically, many of these would be émigrés are said to be looking, in time honored fashion, across the narrow waters of La Manche for their haven. Ironic, because perfidious Albion herself is a shining example of how not to manage a recovery.
For Britain remains locked into a grinding recession of its own with its banks not just being hauled, again, before the court of public opinion, but still sheltering far too many zombie companies on their books, to the decided detriment of those better entrepreneurs who are now being bled in a cut-throat competition with living dead businesses able to operate, at their creditors' behest, only for cash.
Thus, despite allowing its currency to sink further than any major nation in the Crash, to the point of a post-war low; despite passing a sentence of death upon the rentier class, as per the Great Apothecary's quack prescriptions from the 30s; despite the continuation of such a vast scale of government exhaustiveness-amid-'austerity' that Leviathan – and Leviathan alone – has swallowed up nigh unto £1/2 trillion in private sector and foreign savings this past 3 ½ years – so that the Beast has devoured 5 months of total private national output while moving its share of GDP back up towards those same peacetime highs which have twice in a generation seen the country reduced both to internal ruin and external derision – despite all this, Britain remains in enough of a recession to trigger a dangerous attack of populist headline-grabbing from its hapless ruling trio.
It seems the new Huguenots may well avoid the worst depredations of their own leadership by hopping on the ferry at Calais, but they should not count on alighting amid a Land of Milk and Honey, by any means.
Far away, across the Western Ocean, the US – still the best horse in the glue factory as Dallas Fed president Richard Fisher so colorfully puts it – has so far stood above this fray. Not least of the reasons for this is that, despite a dip in the offshore component in QI, corporate profits plus proprietors' income have reached close to the best levels seen, as a proportion of private GDP, in the past five-and-a-half decades, while manufacturers' operating margins have reached their best levels in the past four-and-a-half. Returns on equity are none too shabby, either. The incentives to produce, to invest, and to hire, would seem to be present even if a natural caution still pervades the owners and managers of capital, given both the domestic political uncertainties and the cloudy foreign horizons.
But, of course, THAT was then and THIS is now. With monetary growth slowing at home, and economic weakness afflicting Latam (Brazil's IP just printed its weakest reading in 2 ½ years of -4.3% yoy, taking the level back to those of five years ago), Asia, and much of Europe abroad, the past may not be prologue. Certainly, that seemed to be the message being given by the latest NAPM number which suddenly dropped to what is almost a 2-year low, led by the biggest single month fall in new orders since 9/11 – a plunge only otherwise exceeded in the last half-century by the outbreak of the Iran-Iraq war and the onset of the second oil shock.
Was this a one-off, or is it the first crack in the foundations of a modest American recovery and re-orientation? Only time will tell.
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