Germany's Merkel Urges Further EU Integration - WSJ.com
You want money? Give up your sovereignty.
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My $64,000 question is: Has psyche amongst the periphery citizenry and political spectrum crossed the event horizon into nationalism? The rise of the True Finns in Finland, dwindling political maneuverability for Merkel, and an increasingly dangerous election for Sarkozy in April say that this view is gaining strength.
— (RCS Investments Macro Outlook Begn-2012 — January 16, 2012)
Markets are becoming increasingly nervous and political risk is making a comeback as a head-on collision between investors and ordinary citizens is at hand. Things are not improving over there presently and the consequences of no positive resolution may imperil the global recovery. Looking into the medium-term for “the Zone”, are her individual countries prepared to cede political control to a higher order? Will it be politically acceptable for Germany to continually sign their name on the dotted line to bailout deficit-ridden countries without having some control over that country’s financial affairs? Will citizens of these countries allow German control? Up to this point, I remain unconvinced they will. A comeback for the Peseta, Lira, Franc, or the Deutsche Mark is becoming seriously probable. Perhaps the Euro will split into 2 currencies, a north/south pair?
German Press: "The Greek Exit Is A Done Deal"
It looks like a major flash point is set to arrive in the short-term.
The whole world should be paying attention to what’s about to take place; as it will dictate whether the U.S. economic recovery will continue or a recession and 10%+ unemployment are in store.
I’m not saying that we’re headed towards recession in the short-term, but I am saying that this event will determine whether we (and the whole world for that matter) enters one or not. I don’t feel good about a positive resolution, I hope I’m wrong.
The result may embolden the Social Democrats as they align with French President-elect Francois Hollande in an anti- austerity front pressing for steps to spur economic growth to counter the crisis, according to Thomas Costerg, an economist at Standard Chartered Bank in London. (via Merkel’s CDU Defeated in Worst Postwar Result in Biggest State - Bloomberg)
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We could be in the midst of a interesting turn of events.
Germany has gotten the message that austerity downright isn’t working and is creating an politically explosive situation. Meanwhile, the increased tolerance for inflation from the Bundesbank could be setting the stage for another round of monetary easing from the ECB.
A “Grexit” will likely result in turbulent markets. But it’s becoming clear that monetary authorities will fight the volatility the only way they know how. Ctrl + P. QE in the form of additional purchases of periphery debt (Portugal, Italy, and Spain in particular) to battle contagion.
Furthermore, China continues to shift its monetary stance towards growth-friendly rather than inflation-fighting.
For these reasons, it’s challenging to see how markets can enter a sustainable and uninterrupted bear phase. Volatility is set to rise and sell-offs are likely to continue in the short-term; however, from a medium to long-term perspective (1-5 yrs), these trends support positions in commodities and precious metals. The reflation trade may get an extra ooph soon.
Investor sentiment is increasingly bearish, therefore, this thought process isn’t all that mainstream.
S&P 500
Support: 1,340
Resistance: 1,365
German government moves to allay fears of inflation after Bundesbank comments - The Washington Post
BERLIN — The German government moved Friday to allay domestic fears of runaway inflation after hints by the central bank that it would soften its conservative monetary policy. Comments by Bundesbank officials earlier this week were interpreted by economists as a major shift in the central bank’s postwar stance.
This prompted mass-market daily Bild to front its Friday edition with the headline “Inflation Alarm!,” invoking Germany’s post-World War I national trauma of rampant inflation…
Bundesbank chief Jens Weidmann sought to squash what he described as an “absurd discussion,” insisting that “citizens can rely on the vigilance of the Bundesbank.”
The ECB’s mandate to keep eurozone inflation just below 2 percent “can in individual cases mean that inflation in Germany temporarily lies above the average and at the same time is under the average in other euro countries,” Weidmann was quoted as telling the daily Sueddeutsche Zeitung. — Washington Post
Schaeuble Dares Greece Exit as Contingency Plans Start - Bloomberg
Here’s a good article with plenty of fodder for how European authorities may deal with the fallout from the “Grexit.”
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Buiter and colleague Ebrahim Rahbari wrote in a report published yesterday that the ECB would use its “potentially infinite” resources to restart its sovereign bond-buying program suspended in April and enact another round of long-term lending akin to the 1.02 trillion euros of three-year low-cost loans issued to banks around the turn of year.
Economists at Bank of America Merrill Lynch see a “high” chance the ECB would also halve its benchmark interest rate from the current 1 percent. The ECB could also follow the example of the Swiss National Bank and announce it is prepared to buy euro- area government debt without limits at a certain yield, say 6 percent, said Brown of Schroders. — Bloomberg
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The ball’s in your court Germany (Bundesbank).
Germany Chancellor Merkel Warns Against Abandoning Austerity Reforms « VOA Breaking News
German Chancellor Angela Merkel told parliament Thursday, the structural reforms supporting austerity measures are the only way for Europe to survive the current debt crisis.
Chancellor Merkel said countries using the euro should not scale back or abandon austerity measures now in place. She also said increasing debt to implement growth would plunge the economy back to the early stage of the financial crisis. She said there is no “miracle cure” and that the combination of debt reduction and growth are the two “pillars” to bring the European Union out of the current economic crisis. — VOA
(via Merkel resists calls to put growth before reforms - chicagotribune.com)
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Recent news; such as the Bundesbank softening its stance on inflation, the EU relaxing stringent deficit rules, as well as support for wage increases in Germany to support domestic demand, are signs that Germany is getting the message from the rest of Europe, growth must accompany austerity measures.
However, Merkel made clear again today that there will be no Eurobonds. As I said here, “we’ll budge here and there, but we’re not fundamentally changing our fiscal stance. No Eurobonds or a backtrack of austerity.”
Maybe it’s Germany sounding tough, but not backing it with action. In fact, we are seeing a trend of Germany extending more of a helping hand. The Bundesbank softening its stance on inflation is a big deal (a fundamental change in monetary stance). Perhaps this is setting the stage for monetary easing from the ECB while fiscal adjustments take place.
Furthermore Merkel is actually getting heat at home for not extending growth measures to the rest of Europe. The North Rhine-Westphalia election in 3 days will be interesting to see if Germans may be changing their mood to further austerity.
German Factory Orders Rose More Than Forecast in March - Bloomberg
Bulk of the strength came from overseas orders. Looking at the big picture, Germany’s economy remains resilient. Factory Orders have improved from their downward trend over 2011.
This supports the bulls’ views of a global soft landing.
Schaeuble Says Germany Will Negotiate With Hollande on Growth - Bloomberg
The German government will allow a victorious Francois Hollande to “save face” while expecting him to uphold French commitments to Europe’s budget treaty, Finance Minister Wolfgang Schaeuble said.
Schaeuble’s comments are the clearest indication yet that Chancellor Angela Merkel’s government is preparing for a Hollande victory at France’s presidential election May 6 after publicly backing Nicolas Sarkozy to win a second term. Earlier today, the German government said that diplomatic contact had been made with the Hollande camp.
“We’ve told Mister Hollande that the fiscal pact has been signed and that Europe works along the principle of pacta sunt servanda,” meaning agreements must be kept, Schaeuble said in a speech in the western German city of Cologne today.
“I’ve said that everybody who gets freshly elected into office must be able to save face,” Schaeuble said. “So we will discuss this with Hollande in a very friendly way. But we won’t change our principles.” — Bloomberg
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(RCS): “We won’t change our principles.” Ie. We’ll give away here and there, but no Eurobonds, nor a backtrack of austerity. That’s how I see Schaeuble’s comment.
Needless to say, eventually (and soon I believe), economic conditions will bring this fundamental difference in austerity vs. growth between Germany and France front and center.
Europe needs growth “in the way that Mario Draghi, the president of the European Central Bank, said it today, that is in the form of structural reforms,” the chancellor told a conference of her Christian Democratic bloc in Berlin today. (via Merkel Backs Draghi’s Call for Growth to Combat Debt Crisis - Bloomberg)
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Germany may be having a change of heart. Is it too late? Will pro-growth policies include relaxing fiscal deficit targets?
Hollande pressed the advantage today, telling a rally in Quimper on the Brittany coast that a Socialist victory would “be the end of imposing austerity everywhere, austerity that brought desperation to people throughout Europe.” (via Europe’s Austerity Backlash Gathers Steam in Merkel Test - Bloomberg)
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So what if everyone begins to gang up on Germany and her austerity measures? Like I wondered here roughly 7 months ago, it may be Germany that decides to leave as it announces an emphatic “Nein” against loose fiscal and monetary agendas.
E.U. finance heads push bigger Spain deficit cut - MarketWatch
EU authorities would rather not tick off Spain. The tension is high and growing between periphery nations and Germany the core nations. See two posts down for further detail.
Germany Wants New European Constitution: "There Are New Centers Of Power In The World." -- Mish Global Analysis
“My $64,000 question is: Has psyche amongst the periphery citizenry and political spectrum crossed the event horizon into nationalism? The rise of the True Finns in Finland, dwindling political maneuverability for Merkel, and an increasingly dangerous election for Sarkozy in April say that this view is gaining strength.” — RCS Investments Macro Outlook Begn-2012; January 16, 2012
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Looks like we’ll find out soon.
Some Overnight Econ Data
- German Exports Rebound in January (Note that the headline is misleading; Some bad news on Italy and France is thrown in there).
- Drop in UK Industrial Output Reignites Recession Fears
