Is a Euro Fix Around the Corner?

After telling readers that the Eurozone leader look to be suffering from “dulled reaction times…so out of line with market events that even if they were to snap our of their stupor now, it would be too late,” news reports suggest that they have finally roused themselves.

Or have they?

Ed Harrison has translated a report in Die Welt that describes what on the surface looks like a meaningful change in the Bundesbank’s position (and make no bones about it, the Bundesbank has been and presumably will continue to determine ECB behavior). Less than two weeks ago, a Der Spiegel article that clearly reflected conversations with the new leader of the Bundesbank, Jens Weidmann, depicted him as firmly opposed to monetizing periphery country debt:

One man is bracing himself against the storm. In the battle to save the euro, Europe’s monetary watchdogs are under growing pressure from around the world to buy up unlimited quantities of the sovereign bonds of ailing member states. But the head of the Bundesbank is saying no, and he is making his message loud and clear, not only in Berlin, but also in Brussels, Paris and Washington. If the ECB gave in to the pressure, Weidmann argues, it would not only be violating European treaties and the German constitution. Such a move would also be “synonymous with the issuance of euro bonds.”

It looks as if the market perturbations of last week have either led to a religious conversion, or someone with the 5×7 glossies on Weidmann has had a heart to hear talk with him. Suddenly, Eurobonds are not longer verboten. Per Die Welt:

The Bundesbank no longer rules out emission of common European bonds – so-called Eurobonds. Prerequisite, however, is closer financial integration for the euro countries. “This means joint control over the budgets of the member countries, including intervention rights if individual countries should violate the agreed rules,” said Bundesbank President Jens Weidmann to the “Berliner Zeitung”.

Whether Eurobonds would be introduced, would be a political decision. “You’d be well advised, however, to think about it only at the end of an integration process,” said the Bundesbank chief.

In Brussels fear or hope is rife, depending on whom you ask, Merkel’s people driving policy or those who accuse Germany of blocking solutions. By the next European Council meeting, the Summit of Heads of State and Government at the end of the first week of December, the Chancellor could have negotiated a deal…

What makes it no easier for Merkel: she is increasingly alone. Yes, Sarkozy refrained from making a direct attack on ECB monetary policy while in Strasbourg, but he stressed the “different histories of both countries” in this question.

And the most loyal allies of Merkel are leaving the post. Dutch Finance Minister Jan Kees de Jager, also master of a healthy budget and a proud member of the club of Triple-A countries, wanted, before a meeting with Finnish Ministry colleague Jutta Urpilainen and German Finance Minister Wolfgang Schaeuble on Friday, not to rule out a more “active role” for the ECB.

“Where the ECB is concerned, our position is very close to the German or nearly the same,” he said. But: “In a crisis nothing should be ruled out. In the end, something must happen.” And Urpilainen stated in a newspaper interview: a bigger role for the ECB is still preferable to joint Eurobonds.

As Ed and reader Swedish Lex point out, the Wall Street Journal is making similar noises:

Euro-zone countries are weighing a new plan to accelerate the integration of their fiscal policies, people familiar with the matter said, as Europe’s leaders race to convince investors they can resolve the region’s debt crisis and keep the currency area from fracturing.

Under the proposed plan, national governments would seal bilateral agreements that wouldn’t take as long as a cumbersome change to European Union treaties, according to people familiar with the matter. Some German and French officials fear that an EU treaty change could take far too long. That has prompted the search for a faster option.

The plan, which hasn’t been finalized, would allow the euro zone to announce a speedy change to its governance. European authorities would gain tough new powers to enforce fiscal discipline in the 17 countries that make up the euro zone, the people said. EU treaty changes could then follow at a later stage.

Perhaps I am too much of a constitutional pessimist (pessimists score as more realistic in their assessments than optimists), but I don’t see high odds that this deal will come together in time. I keep thinking of two events: the start of World War I and Lehman.

Most of the European leadership did not want a war, but the combination of treaty obligations and physical distance making it impossible to confer quickly enough. That produced classic “tight coupling” behavior: the declarations of war had to be made on a timetable that prevented intervention.

Similarly, Dick Fuld’s paranoid beliefs to the contrary, the officialdom did not want Lehman to fail. Government officials spent considerable time and effort trying to cobble together a private sector rescue. But their perceived political constraint of no bailouts in the wake of the unpopular Bear Stearns rescue, Fuld’s unrealistic price demands and deal-scuttling conduct (he blew up negotiations with the Koreans), the firm’s deteriorating condition, and JP Morgan’s seizing of collateral meant a deal that was theoretically possible could not in fact get done.

And the undertone of the new Bundesbank position is ugly. “Joint control over the budgets of the member countries, including intervention rights” is an effective end of democracy. You have considerable restrictions on the sovereignity of nations, with no democratic processes or greater accountability being put in place at the Eurozone level, which is where real power will lie. Doubters need only to look at what happened to Ireland and Greece to see what is in store for transgressors. This isn’t a rescue plan, it’s a Eurocoup.

Will enough member states willingly put their necks into this noose? Notice that there is still no willingness on the part of Germany to deal with the contradiction of its stance. It wants to run trade surpluses with its neighbors but is not willing to keep lending to finance their trade deficits.

So the way to square this circle, it appears, will be to turn Germany’s customers into subject nations in a Germany-dominated Europe. This move would be diabolical except I sincerely doubt that many in the elite in Germany would see the debt crisis as a Trojan horse for German ambitions. And I suspect they are right. This is merely the end game of neoliberal policies.

This post originally appeared at naked capitalism and is posted with permission.

3 Responses to "Is a Euro Fix Around the Corner?"

  1. JacquesChirac   November 27, 2011 at 9:02 pm

    Germany will never guarantee the rest of the Eurozone, and the ECB will never act as the buyer of last resort for eurozone government bonds.