Long-suffering investors, desperate for some good news, have seized on the headlines from the latest in a long series of “last-ditch” European summits.
In Brussels on Friday, Angela Merkel certainly indicated some concessions on the use of collective eurozone bail-out funds to address soaring Spanish and Italian sovereign borrowing costs.
The German Chancellor, the argument goes, has “finally capitulated”, now agreeing to back-stop the banking sector debts – and, therefore, the worst of the sovereign debts – of the single currency’s profligate “Club Med” members. And so, we’re told, the eurozone will is now headed for the sun-lit uplands of stability and policy coherence.
“These global economic problems have their roots in the fools’ paradise we all used to live in,” observed Peter Mandelson on Friday, to a packed seminar at the St Petersburg International Economic Forum.
“Pretty much everyone borrowed and spent beyond their means and that’s now catching up with us,” continued the former Cabinet Minister. “And it’s the inter-twining of the sovereign debt and banking crises that makes any eurozone resolution extremely difficult”.
Angela Merkel “vows to build fiscal union,” we were told on Friday, after the German Chancellor’s speech to the Bundestag. I just don’t buy it. Market denizens are desperate for “fiscal union” before the end of the year. The phrase is code for the mighty Germany agreeing to stand behind the liabilities of the more profligate single currency members – something that frazzled debt markets crave.
Berlin will only allow the European Central Bank to let rip, the argument goes, firing up the “virtual” printing press like the US Federal Reserve and the Bank of England, if Germany exerts more control over the spending of other eurozone governments. So “fiscal union”, while under-pinning bond prices, would also spark the mother of all equity market rallies, as the ECB sprayed-out QE funny money. Shares would surge across the globe – which would be nice, just in time for Christmas.
“There’s no such thing as an orderly break-up”, argued my friend, a perceptive and highly-educated man, as we discussed the eurozone over dinner. His argument was that a down-sizing of the single currency should be resisted at all costs.
“The prospect of one or more countries leaving, or being forcefully ejected, is now very real, whether you like it or not,” I replied. “So we should face reality, take the decision, prepare for it now, and do what we can to manage the transition, rather than enduring the horrendous consequences of a market-imposed outcome”.
European debt and equity markets ended a tumultuous week with a rally on Friday. So shares in the US and across the rest of the world rose too. But the threat of a “euroquake” – a systemic collapse which would make Lehman Brothers look tame – is by no means over. Far from it.
Europe’s leaders don’t know how to solve this crisis because they don’t know what they want. Should attempts be made to hold the eurozone together, with Greece staying in? Or should the threat to expel Athens be followed through, at the risk of causing further defections, with monetary union being reduced to a Franco-German rump? This is an enormous question, which only Germany can answer. Until an answer is forthcoming, chaos will continue to ensue.