Merkel under pressure … but unbending
Some interesting events to ponder over the weekend, though not many of them came from the G8 summit which, as is customary, was strong on rhetoric but bare of any specific policy measures to tackle the euro zone crisis. However, markets seems to have tired of their panicky last few sessions. German Bund futures have opened lower as investors took profits rather than seizing on any positive news. European stocks have edged up.
It does appear that with the ascension of France’s Francois Hollande, the G8 firmament turned into G7 (or maybe 5 since we didn’t hear much from Japan and Russia) versus 1 (Germany) but as things stand we’re still heading for a fairly anaemic “growth strategy” unless euro zone leaders coalesce behind the notion of giving Spain and Greece longer to make the cuts demanded of them. Spain has moved the goalposts further in the wrong direction, revising its 2011 deficit up to 8.9 percent from 8.5 and blaming the overspending regions. That means its already loosened target of 5.3 percent for this year is now even harder to achieve.
Hollande is talking up the case for common euro zone bonds but that will not wash with Berlin for a long time yet. Sources said Monti used the G8 forum to promote a pan-European bank deposit guarantee fund. Good idea but that too will only be conceivable if the European financial sector is on the point of toppling. And who will underwrite it? There is talk too of allowing the EFSF to lend direct to banks to ease the Spanish government’s reluctance to ask for help. That may have a slightly better chance of success but Berlin doesn’t like this idea either.
Look no further than the German Chancellor’s take on the summit – it was all a great success, she said. Everyone agreed that we need both growth and fiscal consolidation.
Angela Merkel is one the one with her hand on the purse strings and she knows the markets will only allow so much fiscal loosening.
However, the hefty 4.3 percent pay rise secured by Germany’s most powerful union, IG Metall could be a sign that Berlin is starting to loosen the edges of its anti-inflation culture in order to foster a bit of domestic demand. Any profound return to euro zone growth is going to require some internal imbalancing – and that means Germany buying more from its partners to allow them to export more.
No one can accuse Merkel of being disengaged. Despite denials from Berlin, it seems she may have suggested to the Greek president that a referendum on euro membership should be held in parallel with the June 17 elections, a pretty astonishing intervention in another country’s democratic process.
It is certainly true that the mainstream, pro-bailout Greek parties’ only chance of doing better this time is to turn the election into a “euro in or out” poll by explaining why abandoning the bailout will open the exit door. But they have a lot of work to do to regain credibility. Of a series of opinion polls over the weekend, two put the anti-bailout SYRIZA ahead and another gave pro-bailout New Democracy the lead. Since the party who comes in first gets an extra 50 parliamentary seats, the tightness of the race is going to have markets on tenterhooks for the next four weeks.
We had a nicely timed interview with SYRIZA leader Alexis Tsipras which ran overnight. He meets French leftist Melenchon today and is talking about building relationships and forging negotiations so Greece can stay in the euro. However, he will not be meeting government officials in France and said the terms of Greece’s 130 billion euros bailout were now a “dead letter” and noted what he saw as the changing dynamics at the G8.
In the meantime, Greeks continue to withdraw their money from the banks, a trend which if it reaches critical mass, could force a European policy response even before the election. If that starts taking root elsewhere, the whole system will be creaking.
Spanish banks’ bad loans have hit their highest in 18 years and, with so much tied into a bankrupt property market, no one is quite sure how much worse it is going to get. Late on Friday, clearing house LCH.Clearnet raised the cost of using Spanish bonds to raise funds.