ANALYSIS-German trading ban exacerbates EU political divisions

By Reuters Staff
May 19, 2010

By Luke Baker

BRUSSELS, May 19 (Reuters) – Just when the European Union was beginning to show signs of unity in tackling its debt crisis, Germany may well have thrown a spanner in the works.

Berlin’s decision late on Tuesday to ban several financial transactions — a move designed to quell volatility — not only took the markets by surprise but most of its euro zone partners too, and has led to more uncertainty, not less.

The ramifications for the euro zone and its 11-year-old currency could be profound. Not only does the move undermine efforts to improve coordination and political unity across the European Union, but it has sent the euro to a new four-year low.

“This sends a very unfortunate message,” said Simon Tilford, chief economist at the Centre for European Reform, a London-based think-tank.

“It again suggests that the Germans are no closer to understanding that the markets are not the problem here. The markets are right to be uncertain about the sustainability of the euro zone in its current form.”

Germany’s decision, which immediately banned naked short-selling of certain bonds and stocks, as well as some transactions involving sovereign credit default swaps, a form of insurance on debt, was all the more surprising as it was not disclosed to EU finance ministers at a meeting on Tuesday.

That meeting focused on EU efforts to better regulate alternative investment funds and coordinate policies to stave off the financial and debt crisis — so a discussion on banning short-selling would not have been out of context.

Instead, the European Commission, the EU’s executive, was scrambling to explain on Wednesday that while it understood Germany’s decision, it would have been preferable if it had coordinated with the rest of the 27-member state European Union.

“The Commission understands why, in certain cases, when there is a downward spiral, it can make sense indeed to temporarily suspend naked short-selling,” said Chantal Hughes, the spokeswoman for financial regulation, before adding:

“We believe the action would be all the more effective if coordinated at the European level.”

France, the largest economy in the euro zone after Germany and the one that has pressed hardest to get euro zone member states to coordinate better on tackling Greece’s and the EU’s debt crisis, was left stunned by Germany’s decision.

“It seems to me that one ought to at least seek the advice of the other member states concerned by this measure,” Economy Minister Christine Lagarde said, using language more direct than that usually employed by EU ministers.

“Therefore we are not considering doing it,” she said. “We are not considering following those measures.”

GERMANY GOES IT ALONE

Germany made the moves against short-selling — which is a trade that bets a price will fall — because it said there was excessive volatility in euro zone government bond markets and because it believed the euro was under speculative attack.

“I’ll boil it down to its core,” said Chancellor Angela Merkel in an address to parliament on Wednesday.

“The euro is the foundation for growth and prosperity, along with the common market — also for Germany. The euro is in danger,” she said.

But rather than bolstering the currency, which has lost about 15 percent of its value against the dollar this year, the euro weakened further, falling to around $1.23.

Not only that, but financial market professionals said the moves Germany had taken were relatively easy to circumvent, and experts said a ban on short-selling would only really work if all EU states implemented it at once — something that appears unlikely to happen.

Instead, Germany’s decision looks to have aggravated euro zone allies — particularly France — and fuelled the very uncertainty and political miscommunication that exacerbated the euro zone and Greek debt crisis in the first place.

“What is specific to Germany is a readiness to make unilateral announcements on things that would only be doable if they were done collectively,” said Tilford.

“It’s pretty populist stuff. It’s very difficult to imagine the French doing something like this, making this sort of unilateral decision.”

While others may follow Germany’s lead — Spanish Prime Minister Jose Luis Rodriguez Zapatero said he fully supported Merkel’s decision — any imposition of further limits on short-selling in other EU states is bound to be staggered, and many countries may decide not to take any steps at all.

As a result, national differences over how to tackle market volatility and supervision will be projected into differences at a political level, deepening the euro zone’s faultlines.

Those divisions were already evident in trying to get Germany and other northern European countries on board for the bailout of Greece, and for the $1 trillion deal this month to provide a financial safety net to the 16-country euro zone.

Germany’s financial strength, strong exports and low domestic consumption give it a starkly different economic model to many members of the euro zone, particularly the southern European countries: Spain, Greece, Italy and Portugal.

And now its unilateral move to take on the financial markets and quell volatility may also leave with a different vision.

“The Germans seem to feel that there is little understanding of where they are coming from,” said Tilford. “This shows a growing frustration in Germany, that they are finding it very hard to convince others of their case… It’s worrisome.”

((editing by Janet McBride; Brussels newsroom, +32 2 287 6830; luke.baker@reuters.com))

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