Thursday, February 23, 2012

Merkel Nixes the Big Bazooka

Meryl Streep is playing the Iron Lady on the big screen, but the real Iron Lady (Eisenfrau?) is living in Berlin. Frau Merkel has denied the need for a larger European Stability Mechanism. In case you can no longer distinguish your ESMs from your EFSFs and LTROs and TARGETs and what not, suffice it to say that this particular pot of imaginary cash was to sit in readiness to ward off any speculation against troubled sovereign debt in the PIIGS (Portugal, Ireland, Italy, Greece, Spain), who have become wards of the FANGs (France, Austria, Netherlands, Germany). What Merkel is saying is that the PIGS may owe trillions, but their defense fund will have to content itself with half a trillion to ward off any rambunctious speculators. The IMF, US Treasury, Nicolas Sarkozy, and other interested parties would like to see a bigger bazooka in readiness just in case, but Merkel, for whom moral hazard is more than just twelve letters, is willing to play chicken with the markets.

Merkel was reportedly furious when she heard that François Hollande wanted to renegotiate the treaty if he is elected president. His first days in office will no doubt be made memorable by an icy blast from Berlin, even though Merkel knows full well that this "renegotiation," should it take place, will merely add a few pious wishes about "growth" and "employment" to the clauses about budgetary oversight. The real clash will come when the budgetary rules are violated, as they will inevitably be. What recourse will there be then?

On this point the agreement is vague, and the retaliatory wherewithal of states is limited. Markets, on the other hand, can react, but would-be enforcers will run risks that could stay their hand. For now, however, Frau Merkel is hanging tough, and Schaüble tougher. Peer Steinbruck, who could be the next chancellor, was apparently more optimistic and conciliatory when he spoke at Harvard the other day (I didn't hear him). So when the French elections are over and the German campaign gears up, we can expect President Hollande to lend his support to Steinbruck, just as Merkel and Cameron have lent theirs to Sarkozy (despite the latter's ostentatious snub of Cameron a few weeks back). We thus see the beginnings of a transnational politicking among European heads of state and government, a necessary prelude to the emergence of a fiscal superstate, which, I believe, is the ultimate way out of the present crisis.

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