Happy Talk From Merkel

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

Angela Merkel, courtesy of Armin Kübelbeck http://commons.wikimedia.org/wiki/File:Angela_Merkel_15.jpg

Euro Crisis Will Linger, Merkel Tells Summit – WSJ.com.

Merkel is not trumpeting the latest recovering Eurozone meme that I have been debunking on this blog, but her latest speech to her fellow Eurozone leaders is filled with happy talk and a bad idea or two.

The Chancellor is sticking to the politically correct prescription of labor reforms and austerity for Germany’s Eurozone partners. These actions coupled with new crisis fighting measures from the EU have her lauding their accomplishments,

In the past few months it has become clear to everyone that there is a common determination not only to keep the euro, but also to strengthen its foundations…The international community has recognized this; investors now know it.

While their may be a common determination to maintain the status quo in the Eurozone, the fact of the matter is that it will cost trillions of euros more to do so. In order to build a functioning currency zone, each country must have the same fiscal and economic risks. Currently, businesses, consumers and speculators believe quite correctly that the risks of doing business in Spain or Greece with insolvent banking systems, ongoing depressions  and huge government deficits are greater than in Germany.

In order to equalize the risks across the Eurozone, the banking systems must be unified and government budgets moved to a sustainable path so that the economies may begin growing again. These actions need to be paid for, and Germany has shown a reluctance to do so. Merkel may be preparing her country to commit the vast sums necessary to accomplish Eurozone integration, or she may be stalling. We will not know until after German elections.

The periphery has not changed as much as Merkel claims in this speech. At best, Spain, Italy, Portugal and Greece have made cosmetic labor reforms. It is not appreciably easier to hire and fire workers in these countries, and they have the unemployment rates to prove it. Furthermore, thehy have not made much progress fighting there deficits due to the negative consequences of the reverse multiplier effect. As they make budget cuts, a correspondingly large drop in revenue occurs. Look at Spain’s budget deficit for the last three years:

2012 is projected and 50% larger than official Spanish government figures.

2012 is projected and 50% larger than official Spanish government figures.

The only good news for the Eurozone is that the ECB’s promise to fire up the magic money machine at the first sign of trouble has placed a floor on the price of periphery debt. The promise of OMT coupled with the carry trade enabled by cheap ECB loans to overleveraged European banks has caused a temporary abatement in the downward march of sovereign debt prices.

The lower yields give the Eurozone more time to fight the crisis, but they are not using this time wisely. Markets remain rigid, and it will be difficult to reduce deficits while GDP’s, and therefore tax revenues, continue to shrink in 2013.

As such, the eurocrisis will worsen throughout 2013. Perhaps, this worsening of the crisis will lead to a political breakthrough. Until the all the countries in the Eurozone surrender enough sovereignty to impel the Germans and the rest of the FANG to open their wallets, the crisis will continue.


5 thoughts on “Happy Talk From Merkel

  1. First, congratulations on this great blog, which has become an important aggregator of information for me. I would like to correct you on the point that the crisis will end when enough sovereignty has been surrendered to convince Germans to open their wallets. There is not nearly enough money left in the FANG countries to permanently sustain a massive imbalance. In other “currency unions” like the U.S., the equilibrium is reached through migration, but that does not work in Europe on the scale necessary here.

    The point is that the combination of a loss of sovereignty and an unresolved economic imbalance will lead to revolts, both by the voters (if still asked) and by more organized groups, from the military to stable, richer provinces.

    In regards to Germany, yes, the government to be elected in 2013 (probably a Grand Coalition) will open their wallets. But the political situation is unstable – most voters I know detest all of the current parliamentary parties, while still voting for the least detestable ones (which may vary according to political orientation). Any convincing new party will be pushed up quite rapidly – probably too rapidly. Expect surprises, even dangerous ones.

    • Not to mention that no country is rich enough to bailout Spain, Italy or France. Even if Germany was willing to do so, the cash is simply not available.

      Here is some advice from a member of the American currency union. Once regions become dependent on fiscal transfers, they never become independent. The red states are an example of this rule in my own country, with Mezzogiorno and LaMancha serving similar roles in Italy and Spain, respectively.

      Please keep the comments coming. We’d like to hear more from European voters.

  2. Please do a post on predictions… on what you think might happen over the next 5 years.

    Give us some scenarios… like

    1. Possibly this

    2. Possibly that

    3. Possibly something else.

    Just briefly discuss which ones you think are likely, and why. I would very much like to see a post like that.

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