Angela Merkel and Nicolas Sarkozy meet in Paris today. The circumstances of their meeting are such that at least they won’t be short of things to talk about.
Since they last met the spotlight of investor concern has settled on France, the ECB has felt the need to buy some €22bn of Spanish and Italian debt in order to keep the markets quiet, several countries have banned short selling of financial institutions’ shares and this morning we learn that German growth is almost stagnant.
One thing on the agenda might be what to do if there is renewed selling of French credit default swaps, pushing up the rate France has to pay on its borrowings. France will say that the ECB should intervene as it has with Italy and Spain but what happens if the ECB isn’t keen, reserving its firepower for those in dire need? Would France claim it has lost its AAA rating because Europe let it down? Is intervention a political decision or an economic one? I am afraid they are already getting into this mess – confusing politics and economics – and it will be hard to get out.
The story being pushed about is that Merkel refuses the issuance of eurobonds. It seems that the mainstream of German politics believes it is an idea for the future: for a time when there is Eurozone-wide economic governance and countries will not be able to spend and borrow in the knowledge that Germany will bail them out.
I have been corresponding with my friend Claude Nougat (see her post of 8th August) who takes the opposite view to me and is worth reading.
The Italians and the French are keen on eurobonds but there again I think the cause of monetary stability would be served if my overdraft were guaranteed by a consortium of Richard Branson, Bill Gates and Silvio Berlusconi. What I think is clear is that to introduce such an instrument now, before some sort of fiscal union is created, would be bad for Europe and bad for Germany. Otmar Issing, the first Chief Economist at the ECB and one of the founders of monetary union, a convinced Federalist, says that such a scheme would amount to taxation without representation, in that without having a vote on it, citizens of richer countries would find themselves paying for the mistakes of smaller countries. And many Germans say they don’t think they should bail out Greece when the Greeks retire earlier than they do.
What can we deduce from all this? Firstly that it now appears to be a choice between eurobonds and break up of the euro. Second, that eurobonds seem to be the way things are heading. But eurobonds cannot realistically be introduced without a common fiscal governance. Lastly, to avoid Issing’s charge of taxation without representation there will have to be some democratic input (something our euro-masters are none too keen on). If this were the case, several countries would not be able to go forward, so there would be a new politically integrated eurozone of hard-core economies.
Which is what they should have done in the first place.
My guess, though, is that they will try to paper over the cracks and dither a bit more.
No comments:
Post a Comment