March 19, 2010

German-French Alliance

UK Bank Chief Fears Paris, Berlin Will Push for Eurozone Political Union
March 12, 2010

As trouble surrounding the Greek economy escalated earlier this year, Britain's top banker warned the US that France and Germany will push for political union inside the eurozone currency club and that this could damage London's influence within the EU.

The thoughts of Bank of England Governor Mervyn King were relayed to Washington by US Ambassador Louis Susman after the two men talked in February of this year, as revealed by a leaked cable from whistleblower site WikiLeaks.
"Germany and France will ultimately have no choice but to offer explicit guarantees of Greek debt, argued King," according to the cable.

"The eurozone could not risk a Greek default and euro devaluation would not be an acceptable political option for Germany or France. Germany and France will likely, as a condition of any guarantee, require the ability to scrutinize if not exercise some control over the Greek budget. Longer-term, the drive for greater political cohesion will accelerate."
In May, Greece was handed a €110 billion EU-IMF bail-out.

At the same time, the EU's statistics agency, Eurostat, was given greater powers to scrutinize member state economic data, and the subsequent setting up of a €750 billion eurozone rescue mechanism, only days later, further increased the determination of European leaders to better co-ordinate their economic policies.

A decade after warnings about monetary union being unstable without a parallel political union to co-ordinate economic policies were ignored, EU leaders appear to be coming round to the idea.

French President Nicolas Sarkozy has put forward plans for a European "economic government," while European economy commissioner Olli Rehn has repeatedly said it is time to finally put the 'E' in Economic and Monetary Union (EMU).

Already in February, Mr King worried that this drive for eurozone consolidation could sideline Britain's influence inside the EU.
"The eurozone's move to greater political cohesion could poise some disadvantages for the UK, King speculated," reads the US ambassador's cable.
As an example, the central banker apparently pointed to a meeting of EU finance ministers earlier in February, during which "eurozone governments politely listened to chancellor [Alistair] Darling when he commented on the situation in Greece, but he was not invited to attend internal discussions since the UK is not part of the eurozone."

Mr King went on to warn:
"It would be incumbent for the UK to demonstrate that it has something meaningful to say and to be constructively engaged in the EU, should this greater political cohesion among the eurozone governments occur."
Separately, former French President Valéry Giscard d'Estaing has insisted that the eurozone is not in danger of breaking apart, arguing that it would be impossible for any state to leave and reclaim its former currency.
"It is impossible. Imagine a country decides to return to a national currency. Its citizens do not want. What could they do well with a currency devalued by 40 percent? There is no space for a small change," he told Le Parisien on Thursday

The World from Berlin: 'The Greek Crisis Induces a Sense of Deja Vu'

Spiegel Online
March 4, 2010

Greece's drastic steps toward slashing its national debt have brought workers into the streets. German commentators are divided over whether the measures will help the debt-stricken country avoid default, with the predatory nature of speculators reminding some of the 2008 financial crisis.

Greek Prime Minister George Papandreou was cheered by political and financial leaders in Europe on Wednesday for a new package of budget cuts -- amounting to €4.8 billion ($6.6 million) -- to control the government's soaring deficit.

The austerity measures, which include drastic cuts in bonus payments to civil servants (on top of frozen wages and slashed benefits from earlier measures), have led Greek unions to call for strikes. The severe cuts aim to slash the Greek budget deficit to 8.7 percent of GDP from the current 12.7 percent. Euro-zone rules say national deficits can't exceed 3 percent.

Workers have poured into Athens streets, and on Thursday morning about 200 demonstrators took over the Finance Ministry building, preventing some staff from going to work. But they didn't prevent the Finance Ministry from announcing a new 10-year bond issue later in the day -- a sign of optimism that Greece will manage to avoid bankruptcy.

Demand for the crucial bond issue was high. The €5 billion issue was massively over-subscribed, with total offers amounting to around €15 billion. Greece reportedly had to offer a rate of about 6.47 percent on the bond -- around 0.40 percentage points above the previous rate -- in order to attract buyers. The rate is twice that offered on comparable German bonds.

Papandreou is plainly still hoping for a bailout from his fellow EU governments. According to the Bloomberg news agency, Papandreou told his ministers Wednesday:
"We have fulfilled to the utmost all that we must from our side; now it's Europe's turn. It is a historic moment for the European Union."
Papandreou is due in Berlin on Friday for a meeting with German Chancellor Angela Merkel. Merkel tried to dampen possible Greek hopes of a German bailout when she told German TV on Wednesday that the new cuts in Greece send a welcome "signal" toward restoring confidence in the euro.
"I expressly want to say that Friday isn't about aid commitments," she said, "but about good relations between Germany and Greece."
German papers on Thursday have their own opinions.

The conservative daily Die Welt writes:
"It's more than symbolism for both the European Commission and the European Central Bank to support Greece's new budget cuts. Statements from politicians aren't worth much on financial markets; statements from central bankers are another matter. By taking such a step, the defenders of the euro are risking their most valuable asset, their credibility. Central bankers offer such praise only when they truly mean it."

"Chancellor Merkel will also welcome the cuts. Until now, she's been under pressure to make concrete offers of aid to Papandreou during his visit to Berlin on Friday. Now she can pat her guest on the shoulder, praise his willingness to make economic reforms, and make soft assurances that the euro zone will hold."

"Other governments in Europe have been testing the limits of responsibility with their budget deficits. So far there's no firm plan for the European Commission to deal with such delinquent governments in the future. How can Europe hold the euro zone together without broad agreement on fiscal and economic policies? At the same time, though, the people of Europe are hardly prepared to grant more power to Brussels. As long as these key issues remain unresolved, it will be hard to label German euro-skepticism as hysteria."
The left-leaning daily Die Tageszeitung argues:
"The Greeks have done just what the EU has demanded: They've introduced radical savings measures. But who profits? The euro, the Greeks, or neighboring Europeans? This drama could show that no one benefits at all; in fact everyone, perhaps, will suffer."

"In the Greek case, it's evident that radical savings during an economic crisis will just make the crisis worse. Workers who receive 7 percent less in salary will have 7 percent less to spend in the economy -- in restaurants or in businesses that may then have to lay off employees. (These budget measures) will steer Greece into a depression at record speed."

"The crisis in Greece can't possibly leave the rest of Europe indifferent, because the Greeks have not borrowed the money from themselves, but from banks in France or Germany. Those banks' loans will only get less, not more, secure if Greece plunges deeper into crisis. The new austerity measures, meant to calm financial markets, will in the long run just increase the unrest."
The business daily Handelsblatt, however, writes:
"Papandreou has scored a coup with these new austerity measures. Now the Greeks will be saved from bankruptcy and the markets will come to their side. Papandreou has gambled and now stands to win, because he's now receiving verbal and political support from every corner."

"If the situation with Greek government bonds can stabilize in the next few weeks -- which is expected -- then we will see the right environment for the issuance of a new Greek bond. The sheer size of the bond issue will in this case not play a decisive role. If the Greeks successfully place an issue of €3 billion - €5 billion with institutional investors, then the spell will be broken. What's important for the Greeks is to show clearly to the outside world that they again have access to international capital markets -- to say, 'We have the means to refinance our own debt.'"

"If trust in the Greek government returns among certain core investors, all other large investors will take notice. In spite of such a success, of course, interest payments would remain high. Greek bonds would be worth buying again."
The Financial Times Deutschland argues:
"Karl Marx famously said that important historical events happen the first time as a tragedy, the second time as a farce. It's remarkable how financial markets these days are proving the prophet right. The Greek debt crisis certainly induces a sense of deja vu."

"The bank bailouts from the first year of the global financial crisis are lodged firmly in the minds of bankers and fund managers. Many big market players are currently betting on the bailout reflexes stemming from those first months of panic. People in banking circles have been saying for weeks that the euro zone would never let one of its poor relations default."

"It should come as no surprise that the markets would test the limits of EU governments. Investors want to know for certain if Germany, in the end, will always come to the rescue of Greece and other member states holding enormous domestic and foreign debts. So interest rates on Greek bonds have continued to rise to levels that even many bankers think are too high."

"If the governments in Paris and Berlin over the next few days step in with aid, the farce will be perfect: a bailout as promised, with uncertain results. Every new bond issue in southern Europe could bring a new emergency, and no one knows when the markets will be satisfied. Will €4 billion or €17 billion be enough? Or should Germans maybe set aside €40 billion to rescue Greece? Debt managers in Athens will have to borrow at least that amount this year."
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