Killing fiscal union before it’s born27 June, 2012, 14:35. Posted by Zarathustra
Tags: Euro Crisis
Yesterday, just days before the yet another European Summit and 2 days before the new ultimatum by George Soros, the Euro "quartet" (European Central Bank’s Mario Draghi, Eurogroup’s Jean-Claude Juncker, European Commission’s José Manuel Barroso and European Council’s Herman van Rompuy) came up with a Eurovision proposal "Towards a genuine economic monetary union", which suddenly look a lot closer to the fiscal union we have been talking about for quite a while. So finally the Europeans are getting it…
Because soon, our dear Bundeskanzlerin Angela Merkel immediately killed it, saying that there will not be shared total liability "as long as I live".
As we said earlier in a somewhat oversimplified manner, fiscal union for Europe ultimately means that the Germans have to essentially give money away from deficits countries, thus understandably the Germans are not keen on it, and we have never been optimistic that any real solution could ultimately be politically acceptable for all parties involved. On top of that, the Germans, are known for their obsession of price stability (or paranoia of hyperinflation). Kit Juckes of Société Générale wrote a short note yesterday which kind of sums up what at least some Germans are thinking:
A (wise) German fund manager asked me why Anglo-Saxon analysts and strategists are so keen on the ECB buying European debt. He suspects they (we?) under-estimate inflationary risks and are biased by the possible benefits for our employers. To conclude that all Germans are implacably opposed to monetary largesse and that the Euro will either not survive or be doomed to yen-like strength would be unfair, but as we await the EU Summit we are as far away from Eurobonds, fiscal union, banking union and QE as we have ever been.
To be sure, the survival of the European monetary union is now entirely dependent on politics, not so much on economics. History tells us that political support is key for the survival of any currency union. The politics, however, is not in favour of further integration. As George Soros wrote earlier on the political bubble of Europe is bust, and the integration of Europe in the past decades has turned into a process of disintegration.
Ray Dalio’s shop Bridgewater has a very nice summary of what’s happening (via Zerohedge):
Alliances are shifting in a logical manner. The German-French alliance is breaking down in favor of contributor (higher rated credit) countries aligning against recipient (lower rated credit) countries. Similarly, the terminology to describe who is reasonable and who is unreasonable reflects these parties’ respective interests. Those who don’t have to contribute use terms like "inflexible" and "irresponsible" to describe the contributors’ reluctance to "do enough" to prevent collapse by lending more to recipients who can’t service their existing debts, while those who have to contribute use terms like "inflexible" and "irresponsible" to describe the recipients’ reluctance to "do enough" cutting of their spending and borrowing to service their debts. Students of human nature and deleveragings know that this is to be expected.
Similarly, talk of a fiscal union to resolve these problems has to be looked at in light of the question of whether it is in the interest of fiscally strong contributors to have a fiscal union with fiscally weak recipients in which the majority rules how the money is divided.
For this reason, we think the popular assumption that the Germans and the ECB (which requires agreement of the key factions within it) will come through with the money to make all these debts good should not be taken for granted. Said differently, we think there are good reasons to doubt that European bank and sovereign deleveragings will be prevented from progressing to the next stage in a disorderly way, without a Plan B in place. This "fat tail" event must be considered a significant possibility.
So despite the fact that any country exiting the Eurozone will be extremely costly for everyone in the Eurozone, that does not mean that it is not possible, just like the War.