Merkel wanted to delay her decision on Greece until after the CDU fanned off
challenges in the May 9 regional elections. Her reluctance to take up the role
of decisive leadership damaged the
euro, her coalition government in Germany and, ultimately, herself as an
effective leader in world affairs.
The issue of a transfer union
Merkel's closest advisers are adamant that they took the lead in drafting the
rescue plan and that no lasting defeat has been suffered. Yet since the finance
ministers of the eurozone signed off on their 750 billion euro stabilization
package in the early hours on Monday, May 10, members of the German government
and senior officials have been fighting a desperate rearguard action to deny
they have allowed the European Union to become a "transfer union", a term to
mean the EU could become little more than a transfer mechanism to switch money
from rich taxpayers in Germany to poorer ones in southern and eastern Europe.
The term has become part of the political lexicon in the debate over massive
credit guarantees for members of the Eurozone.
"We will not allow any transfer union," asserted Ulrich Wilhelm, state
secretary and chief spokesman for Chancellor Merkel, in his official account of
the massive Brussels deal. "We achieved that goal," pointing out that the 440
billion euros in credit guarantees would not come from any EU fund, but from
The rise of France's economic government
"France has won" was the common reaction in Europe on the day the deal to save
the eurozone was done. Recapturing the leadership role for Europe from Germany
has been the goal of France since the end of the Cold War.
Behind the loaded German domestic political debate sits a deep suspicion that
France, Germany's closest ally and greatest rival in the EU, has finally
achieved its goal of creating of an "economic government" which subordinates
the independence of the European Central Bank to political imperatives.
Instead, the German emphasis is all about "stability" of the euro, and with it,
the German economic structure. Merkel insists that she is only prepared to lend
German money, whether to Greece or any other needy eurozone member state, to
preserve the stability of the common currency. "I have made it clear that for
us in the federal government, the most important thing is the stability of the
currency," she said. "I am very proud of our German culture of stability."
This fixation on the German culture of stability is behind Germany's insistence
on all eurozone member-states to commit themselves to tough austerity programs,
and to promise to accelerate action to regulate market speculators.
On the question of regulations, Merkel and Luxembourg Prime Minister
Jean-Claude Juncker called for urgent regulation of credit-default swaps (CDS)
to shore up financial stability in the euro area and prevent a rerun of the
Greek financial crisis which still threatens to spring up like wild flower
after a spring rain all over eurozone.
Merkel, speaking to reporters in Luxembourg on March 9, moments before Greek
Prime Minister Papandreou met President Barack Obama in Washington, said the EU
must take the lead in curbing the "very speculative elements" of derivatives
trading, going beyond previous Group of 20 agreements. "We're of the opinion
that a quick implementation of actions in the area of CDS has to happen,"
Merkel said. Citing "ongoing speculation against euro-region countries", she
called for the "fastest possible" implementation of new rules.
Europe must "do everything to avoid unhealthy speculation", said Juncker, who
heads the euro-area finance ministers group. European leaders are ratcheting up
the pressure for tighter global regulation of derivatives as they seek to learn
the lessons of the Greek fiscal crisis. Papandreou was expected to press Obama
to help combat the "unprincipled speculators" that threaten a new global
financial crisis. "Europe and America must say 'enough is enough' to those
speculators who only place value on immediate returns, with utter disregard for
the consequences on the larger economic system," Papandreou said in a speech in
Merkel and Sarkozy are turning to regulatory efforts to help tame the surge in
Greek financing costs. Greece's budget gap, at 12.7% of Greek GDP, is the EMU's
biggest and more than four times EMU limits. Papandreou's government last week
outlined measures to save 4.8 billion euros, including higher fuel, tobacco and
sales taxes, as it seeks to lop 4 percentage points off the budget deficit.
EU Economic and Monetary Affairs Commissioner Olli Rehn said in an interview in
Strasbourg, France, that Greece is "on track" to achieve its deficit-cutting
goals following the passage of extra austerity measures. The new measures put
Greece "onto the path of fiscal adjustment for 2012 below 3%" of GDP, he said.
The difference in yield, or spread, between the 10-year Greek bond and its
German equivalent, the bund, rose 1 basis point to 307 basis points as of 12:42
p.m. on March 9 in London.
A European monetary fund
As Papandreou pushes ahead with deficit-cutting plans that have set off deadly
and massive protests in Greece, European leaders may be headed for a split over
a proposal to set up a lender of last resort to bolster fiscally distressed
euro-area countries. Merkel, whose finance minister Wolfgang Schaeuble
champions the idea of a European monetary fund (EMF), said it would work as "a
measure of last resort" and only after "a cascade of sanctions" against
governments that break euro rules. A change of European treaties would be
required, Merkel said.
French Finance Minister Christine Lagarde said an EMF may not be the best
option: "Other ideas need to be studied and those that respect the Lisbon
treaty are much preferable." Luxembourg's Juncker said any such fund should not
create an opening "for countries that don't take budgetary discipline so
Bundesbank president Axel Weber, a European Central Bank governing-council
member, also questioned the fund proposal. He also said he sees the need for
more transparency in the CDS market. "The CDS market has developed very
strongly and drives prices in bond markets," Weber told reporters in Frankfurt.
"Not everybody who buys protection has an underlying exposure. It's a very
intransparent market, we need to have a much more transparency."
While European leaders seek ways to limit CDS, Germany's BaFin financial
regulator said market data lack evidence that the instruments were used to
speculate against Greek bonds. Data provided by the US Depository Trust &
Clearing Corporation did not show that new open positions were built up and
also does not indicate "massive speculative action", BaFin said in a statement.
Yet the German government is fighting an uphill battle against commentators and
opposition politicians, even from the ranks of its own coalition, to persuade
the public that the "special purpose vehicle" that will provide credit
guarantees to Eurozone members is not a "transfer union" by another name.
Bild Zeitung, the mass-circulation newspaper that has been fighting a daily
battle against the Greek bailout, and now the wider 750 billion euro eurozone
stability plan, taunted the chancellor on May 11: "The 'safety parachute' for
the euro is the ultimate crime for Europe," it declared. "We Germans have made
sacrifices for a stable euro for the last 10 years, with wage restraint and
sacrificing pension rises. We have paid the price while others have been
partying at our expense ... Europe's path to a transfer union is simply a road
to its ruin."
The German taxpayers' federation said the same day that its members had been
taken unawares by the government, which claimed there was no alternative to the
package. "These decisions will cost us very dear," said Reiner Holznagel,
As for Greece, there have been no further riots since May 5, when the public
was shocked by three deaths that resulted from the fire bombing of a bank. Both
in Greece and Germany, a slight majority was emerging in favor of the European
bailout, while still 66% of Germans are favorably disposed towards the euro,
the fate for which is closely tied to the fate of sovereign debt of Eurozone
Just as the Obama neoliberal centrist Democrats are facing electoral defeat by
conservative right-of-center Republicans in the mid-term election because of
theirs inept handling of the financial crisis, Merkel's Conservative Christian
Democrats experienced electoral defeat by a new coalition of left of center
Obama consulted the leaders of Germany and France on Sunday, May 9, on jittery
European financial markets and the need for European leaders to take steps to
build confidence in the markets. Obama spoke first by phone with Merkel and
later with Sarkozy.
It was his second conversation in three days with Merkel. White House spokesman
Bill Burton said the phone conversation with Merkel was part of Obama's
"ongoing engagement with European leaders with regard to the economic situation
there. ... They discussed the importance of the members of the European Union
taking resolute steps to build confidence in the markets."
After the talks with Sarkozy, the White House issued a nearly identical
statement describing the conversation, different only in saying that Obama and
Sarkozy had "agreed" on the need for European steps to build confidence in the
At one point during a call with Group of Seven officials at the weekend of May
7, US Treasury Secretary Tim Geithner made it clear that the US was not pleased
with the eurozone rescue package as it stood. A person with knowledge of the
discussions told the press that Geithner was "very direct", telling his
counterparts the intervention was not in the "right order of magnitude" and
should be increased, and more commitments were needed from struggling countries
in terms of "fiscal credibility". Geithner himself has been criticized for the
inadequate size of the US stimulus package.
Geithner's forcefulness highlights how US officials have stepped up their
involvement in efforts to contain the European sovereign debt crisis in recent
days, amid escalating fears within the Obama administration and the Federal
Reserve that the US recovery might be under threat. An apprehension that was
justified by the sharp declines in US equity markets since the Greek crisis
began. Even the trillion dollar stabilization package brought only two days of
respite in a secular bear market that began in mid-April, 2010. Concerns for
financial stability in Europe had been at the top of Washington's economic
agenda for weeks, but a sharp drop in markets at the end of April put
policymakers in crisis mode.
Fed-ECB currency swap renewed The Fed also began working with the European Central Bank and other central
banks on ways to reinstate currency swap lines that were introduced during the
financial crisis to help foreign banks gain access to dollar funding. The swap
lines, which totaled nearly $600 billion at the height of the meltdown, were
wound down by the start of 2010.
The Federal Open Market Committee, which sets US interest rates, held an
emergency session on Sunday, May 9, to approve the swaps - a move supported by
the Obama administration amid hopes it would provide another tool to ease the
strain in the credit markets.
The decision to reinstate the currency swap facilities was seen within the Fed
as a relatively risk-free way of helping out Europe: its counterparties in the
swaps are foreign central banks, not the financial institutions that primarily
benefit from the deals, and there is no foreign exchange risk because the price
of the swap is agreed at the outset.
Continuing doubts about the sustainability of the fragile recovery in the US
and the potential for credit strains in Europe to cross the Atlantic meant US
officials felt compelled to get more involved.
The European debt crisis has unfolded amid questionable growing optimism on the
strength of the US recovery. Incurable optimists are pointing to the economy
posting a 3.2% annualized growth rate in the first quarter of 2010 and four
consecutive months of job creation as sign of a v-shape recovery.
Yet fundamental data show serious structural problems remain while reform
activism has been ground to a halt. Structurally, the credit system remains
hopelessly impaired, with stimulus money going to perpetuate the very same
malpractices that have brought on the systemic crisis. Fiscal and public debt
difficulties are demolishing many of the most productive states. Consumer
spending cannot revive without a significant pick up in employment which is
nowhere in sight.
Most of the bailout money given to distressed banks has gone into carry trade
for synthetic speculative profit from interest rate arbitrage in cyber finance,
totally detached form the real economy where the creation of jobs and products
counts. The entire financial sector, including all the too-big-to-fail banks,
seems to be under indictment for criminal fraud that would take years to move
through the courts, with decades of associated civil litigation that will leave
lingering uncertainty in the market.
The rise of the dollar against the euro and the yen will also torpedo hope of
revival for the US export sector. The US federal government is in danger of
being turned into a partisan gridlock after the mid-term election next
November, with the possibility of a premature lame-duck presidency two years
ahead of normal.
Next: The trillion dollar failure
Henry C K Liu is chairman of a New York-based private investment group.
His website is at http://www.henryckliu.com.