Tag Archives: Angela Merkel

Last weekend, Angela Merkel debated her opposite number Martin Schulz on television, ahead of this month’s election. What was billed as a ‘duel’ between the German Chancellor and her Social Democrat challenger, was actually more of a ‘tea dance’.

Largely agreeing with Merkel throughout, Schulz made little impact. With a fortnight to go until the 24 September election, it’s now almost certain the Christian Democrats will prevail. Having led her party since 2000, and Europe’s largest economy since 2005, Merkel is set to win another term.

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“En Marche!” That’s the message of Emmanuel Macron – the telegenic “independent” inaugurated today as the youngest ever President of France. Can Macron get the moribund French economy “on the move” as his slogan suggests? Can this 39-year old, with only two years of political experience, no Parliamentary party and having never held elected office, succeed where so many have failed, injecting some dynamism into France? And can he re-invigorate the crisis-ridden European Union.

Much is at stake. The world’s sixth-biggest economy, France is also the second-largest member of the eurozone – a key player, economically and diplomatically, if the single currency is ever going to work. Having seen off Marine Le Pen, can Macron now drive jobs, growth and broader French prosperity, so keeping bad-tempered euro-populism in check?
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Brexit clearly caught financial markets on the hop. With opinion polls, betting odds and the “conventional wisdom” all pointing in one direction, the vast weight of money thought the UK would stay in the European Union.

That’s why, when reality hit in the small hours of Friday morning, the pound plunged violently, enduring its biggest one-day drop in living memory. And when the London stock market opened later, the FTSE-100 dropped a stomach-churning 8.7pc – again, showing the extent to which traders had previously backed Remain.

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So, the gloves are off. Anyone who thought negotiations between the new radical-left Greek government and its creditors were going to be conciliatory, or even rational, must think again. It’s only a few days since Syriza’s seismic election victory and the installation of Alexis Tspiras as Prime Minister. Yet discussions over Athens’ €350bn (£240bn) debt mountain – owed mainly to other eurozone governments, the International Monetary Fund and European Central Bank – have already turned ugly.

Greece and its official creditors are now issuing full-blooded threats and counter-threats, regardless of the impact on financial markets. The Athens Stock Exchange endured single-day double-digit percentage falls last week. On Tuesday, Greek banks, effectively controlled by official foreign creditors, lost over a quarter of their value.
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The German government is stuck on the horns of an extremely nasty dilemma. Berlin’s decision will go a long way towards determining whether or not we endure serious instability on global financial markets over the coming months. The future path not just of the eurozone but also the UK and, in fact, the entire world economy will be impacted significantly by Angela Merkel’s next move. The German Chancellor, moreover, has just days to make up her mind.

Is Berlin to permit full-scale quantitative easing? Will Germany’s coalition government allow money created ex nihilo by the European Central Bank to be used to buy the sovereign bonds of otherwise insolvent eurozone nations? While this is an arcane,technical question, the real-world implications are huge.
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After months of escalating tensions over Ukraine and talk of a new cold war, Russia and the West could soon reach a sanctions rapprochement. The eurozone economy is suffering badly and sanctions are partly to blame. Winter is also upon us, and that reminds everyone Vladimir Putin still holds the cards when it comes to supplying gas.

The clincher, though, is that Kiev is in a deep financial hole and fast heading towards financial meltdown. Unless an extremely large bail-out is delivered soon, there will be a default, sending shockwaves through the global economy. That’s a risk nobody wants to take – not least in Washington, London or Berlin.
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This column was going to be about emerging markets – and the potential impact on the UK of the recent slowdown in the generally resurgent economies of the East. It was going to be relatively upbeat, not least because I’m an emerging markets enthusiast and think it’s wrong to confuse a blip for a trend.

Yes, stock markets and currencies are suffering in the likes of India and China, largely due to Federal Reserve “tapering” – the reining in, by America’s central bank, of its $85bn-a-month money-printing habit. Last month, as the Fed’s funny-money machine slowed marginally, exchange traded funds focused on shares and bonds from developing nations endured withdrawals of $7bn – a January record. The MSCI EM index of leading emerging market shares shed a painful 9pc, compared to a 1.6pc drop in the S&P500, the bellwether index for Western stocks.
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So “Super Mario” did it. The European Central Bank President on Thursday announced “unlimited bond-buying” to tame profligate eurozone members’ borrowing costs. “Under appropriate circumstances, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability,” Draghi told an expectant world.

The ECB, then, is still referring to “price stability”, pretending its actions are designed with its regular inflation-target in mind. We are, patently, a long way beyond that point. Draghi’s plan is the latest ECB attempt – perhaps the most serious yet – to prevent the break-up of the single currency. Be aware, though, that “perhaps” is the operative word.

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With Ben Bernanke’s deeply inconclusive Jackson Hole missive now behind us, all eyes are firmly fixed on European Central Bank President Mario Draghi. Back in early August, Draghi publicly pledged to do “whatever it takes” to prevent the break-up of the single currency.

This statement, which a vacationing Angela Merkel didn’t contradict, was taken as a sign that the ECB would soon be buying large quantities of government bonds issued by essentially bankrupt eurozone nations. As such, Spanish and Italian yields stopped rising and global markets remained calm during the dog-days of summer – moving mainly sideways, albeit on very low volumes.
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The summer holiday season is in full swing. Most investors have been at the beach in recent weeks – or fixated by the splendid London Olympics. Global markets have been treading water, but trending up on very low volumes. US stocks, in fact, have drifted 10pc higher than their low in early June.

What attention to financial matters there is has been riveted on the eurozone, and the possibility of a huge dose of quantitative easing by the European Central Bank. Over the last week, ECB President Mario Draghi has come as close as he possibly can to announcing a barrage of virtually-printed money, without actually announcing it. While wanting to soothe market nerves, so allowing Europe’s ruling classes to remain relaxed on their summer sun-beds, Draghi is also petrified of pushing Berlin too far and provoking an explicit “nein”.

Germany’s deeply-engrained reluctance to “monetizing” public and/or private sector debts is the main reason, of course, why the ECB has so far been relatively moderate in its use of QE. I say “relatively” because the 148pc increase in the ECB’s balance sheet since 2007 is still without historic precedent. It is dwarfed, though, by the incredible 225pc balance-sheet ballooning by America’s Federal Reserve over the same period and the truly jaw-dropping 362pc mega-expansion by the Bank of England. Yep, when it comes to medals for money-printing, Team Central Bank Anglo-America is Steve Redgrave, Chris Hoy, Carl Lewis and Michael Phelps combined.

Buoyed by the spirit of competition, perhaps, “Super Mario” now wants the ECB to clamber onto the QE podium and perhaps even challenge for gold. Most mainstream equity investors are cheering him on, despite the massive damage QE will do to the Western world in terms of inflation, savings debasement and crippling future borrowing costs.

In early August, administering some summer balm to the markets, while keeping the Germans just on-side, Draghi issued an elliptical statement: “The Governing Council may consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission”.

In other words, the ECB will come to the view that more eurozone QE is appropriate at some future date if bank lending remains at rock bottom – which, of course, it will, given the massive smouldering losses lurking on (or mostly off) the balance sheets of many of the eurozone’s “leading” banks.

If busted European banks keep black-mailing insolvent eurozone governments by failing to extend credit to the broader economy, Draghi is effectively saying, so continuing to trap much of the region in a debilitating recession, then said eurozone governments will allow themselves to continue to be black-mailed. I paraphrase, but not a lot.

The ECB, then, has indicated it is now willing to resume purchasing the sovereign bonds of the eurozone “periphery” on a big scale, providing those countries sign up to further “conditionality” in the form of budgetary rigour and structural reform. While Berlin can’t yet endorse fully-blown eurozone QE, the ECB’s sotto voce message goes, Chancellor Merkel may just about be able to stomach a raft of sovereign bond purchases if the related announced conditions are strict. That would allow German ministers to jump up and down, castigating foreign profligates while pretending the Latin types, having taken the German geld, will now, finally, stick to the fiscal straight-and-narrow. Which, of course, they won’t.

Until recently, Spain – and by extension Italy – had hoped the ECB would step-in to support them on the basis of home-grown austerity measures without Madrid or Rome having to endure the political humiliation, and related market trauma, of applying for a condition-related bail-out. But now the question is whether the leaders of Spain and Italy will be able to bury their political pride sufficiently to agree to some tough “bail-out style” Berlin-imposed conditions on what they can and cannot do, even if it isn’t explicitly called a “bail-out” – and whether the feisty Spanish and Italian electorates will accept such demeaning anti-democratic subjugation.

The possibility of all that happening is apparently now high enough that Spanish and Italian bond yields have recently come back from the brink. An emboldened Draghi has even begun trying to intimidate traders by claiming that shorting the euro is “pointless” because “monetary union is irrevocable”.

The sleight of hand is just breath-taking – of Olympic proportions, in fact. If Spain and Italy do bite the political bullet, it appears the ECB will buy their sovereign bonds to an extent that goes beyond the existing resources of the European Financial Stability Facility and the upcoming European Stability Mechanism. The size of these bail-out vehicles is currently the source of bitter international squabbling, seeing as it was previously assumed they would be used to channel real money. If the bazookas are loaded via QE, though, then their size is potentially limitless. I mean, look at the Fed and the Bank of England.

This is Draghi’s implicit signal to the markets. Merkel – on vacation during the ECB’s recent spin-fest – for now is remaining tight-lipped. Did Draghi have her agreement to say what he (almost) said? Maybe, but maybe not. Is the wily Italian playing a high-stakes game of “chicken”, attempting to force the Iron Frau’s hand. That could also be true. For if Merkel now explicitly slapped-down Draghi’s “plan”, the markets would seriously rebel.

Not for the first time, I’ve ended up writing about the eurozone when my intention was to highlight something else. That something was the recent volte face by Sandy Weill, the swaggering Wall Street financier who, in the late-1990s, forged the then illegal merger of Travellers’ Insurance and Citibank. In doing so, Weill created the mighty Citigroup, so consigning to history the Glass-Steagall Act – the Depression-era separation of commercial and investment banking.

For a very long time, this column has argued that the 1999 repeal of Glass-Steagall was the single most important cause of the sub-prime crisis and its related economic fall-out. Sanford Weill, the man who did more than anyone to remove this crucial safeguard, is now admitting he was wrong.

“We should probably now split up investment banking from banking,” Weill said on US television, during an eve-of-Olympics confession. “Have banks be deposit takers, make commercial and real estate loans … do something that’s not going to risk the taxpayer dollars, that’s not too big to fail”.

For Weill to say this is like Colonel Sanders calling for chicken-free diets. Equally incredibly, Weill also called for “full disclosure”, criticizing investment banks’ use of off-balance-sheet subsidiaries – a black art in which Citigroup excelled.

Why this conversion from Weill, a conversion which has bolstered the case for bank reforms going well beyond America’s Dodd-Frank measures or the UK’s Vickers proposals? As shown by the Citigroup share price, now just a tenth of its 1999 level, most of the banking behemoths are now probably worth more broken up. And having made his massive fortune and now approaching his 80s, Weill is tidying up his memoirs.

But still, both Weill and John Reed, the two Citigroup founders, now both back a new Glass-Steagall. I wonder if Robert Rubin does too.

Having steered the Glass-Steagall repeal into law, the Former US Treasury Secretary then went to work with Weill and Reed at Citigroup. Rubin earned tens of millions of dollars, before the bank turned to American taxpayers for a multi-billion dollar bail-out. Rubin’s memoirs, written in 2003, barely mention Glass-Steagall. Perhaps they’re in need of an update …