German Chancellor Angela Merkel said the European Financial Stability Facility could possibly be used to buy eurozone sovereign bonds on the secondary markets with strings attached but that there are no concrete plans at this time to do that.
That was Wednesday. By Friday morning Bloomberg was reporting that Merkel had agreed to terms for EFSF and the European Stability Mechanism to buy secondary market bonds.
Make no mistake. Merkel has not gone soft in the last 48 hours. She has not been charmed by Socialist French President Francoise Hollande into accepting a single European bond infrastructure for Europe. Her most ardently held view remains that it would not be right for triple A-rated countries like Germany, Finland and other contenders like Austria and The Netherlands, to accept much higher costs of borrowing which would come of any rating downgrade which these sovereigns would inevitably face. She is not giving into a licence to print easy money for the more spendthrift nations of the eurozone who have only proved that they cannot be trusted to collect tax revenue and keep a lid on spending.
The concept of a single European bond programme is actually a brilliant one. A true utopia like the classic Das Kapital by Karl Marx or some floral socialist view from Herzen or Mao.
But in reality they are only a good riveting read. They are good thrillers, that calm us and make us believe that things could get better. Religion is pretty good at that too. And I make no critique of that. It’s good to have a faith and to believe in ideals. They make us stronger, more positive people.
But, don’t for one minute expect all of this European utopia to become realistic on Planet Earth.
In order to bring in the idealistic single European government bond structure, you need stability, harmonised tax, harmonised economic growth, equal political and cultural aspirations.
We don’t have that. And for countries like debt-stricken Greece to even reduce its debt pile to managable and sustainable levels, to foster enough economic growth to make it, would take easily one or maybe two generations (25 or 50 years).
What is more, if Germany faces a downgrade, the cost of borrowing for the engine of Europe’s economic growth will be at risk. Siemens in Germany, Nokia in Finland and so on will face hardship with the amount they need to borrow just to innovate and provide the very wealth that the single European bond utopia relies upon!
Timing is everything. Even Das Kapital had to wait 70 years before a Russian Revolution was able to put some of it into effect.
So too with single European bonds. Until and unless harmony returns to Europe the concept of a single European bond is simply unworkable. It would be as foolhardy to introduce as Britain’s folly trying to resuscitate the Gold Standard in 1920 at 1914 prices and exchange rates. It too failed and caused Britain to have 20% mass unemployment when other countries were enjoying the High Life in the Roaring 20s.
As I have written previously in this blog, you cannot simply change your battle plans to win a war if your general has his back against the wall and therefore no room ro move and change direction!
One of the contingents for a single European bond is harmonised fiscal policy. And that factor alone is doomed. What would the fiscal policy be? Who sets it? Who runs it? It would lead to federacy. But is that definitely what Europe signed up for? Doubt that very much.
Some might say it is easy to criticise without offering a solution. So my offer is a painful one. It involves the write off of inflated assets as well as the debt. I have written about that before. I have also said why I believe that Greek exit from the eurozone with a promise for future re-admission is a safer bet and sound advice.
While we contemplate how we will price and execute this necessary adjustment, I remind you of a very British slogan from an earlier, military war. As people look for a fast spendthrift solution, while they persist to call for Germany to pay for everyone else without sufficient checks and balances, I say: Calm Down And Carry On!
That is right. There is no quick fix for Europe. There is a need to gradually bring down wayward yields, to lower cost of borrowing, to tease back economic growth, and a need to restore leadership in Europe if you really want Moody’s, S&P and Fitch to start upgrading European nations. It sounds weird and distant doesn’t it? Upgrade. We have been so used to downgrades!