Friday, February 3, 2012

Reading Frau Merkel's lips

Wolfgang Munchau writes in the FT on 20the Feb that Mrs. Merkel is doing everything possible to force Greece's exit from the EU. Assisted suicide, he calls it:

And this is what I wrote on Feb 3rd, 17 days ago:

17 summits in the last 3 years. No, that’s not the track record of a mountaineer, but the number of meetings EU leaders have held in the effort to save the Euro.

Through the serial summits, German Chancellor, Angela Merkel, has made it clear that German purse-strings are going to be opened very cautiously; this is dictated by fiscal prudence, by the strictures of the German constitutional court, and above all by domestic German politics. In a situation where three-quarters of German voters do not want their government to aid Southern Europe, Chancellor Merkel would be irresponsible to go against the will of her people.

Economic commentators have been saying that the costs of saving the Euro go up with every week of delay, echoing Shakespeare’s Macbeth, “If it were done, ‘tis best it were done quickly”. I am sure Merkel has enough advisers for her to put pretty precise estimates on the cost of this delay. My sense, then, is that she has no intention to save the Euro by expanding her government’s guarantees for the debts of other nations.

The surest signal, to my mind, of her intention came from her recent demand that the Greek government hand over its budgetary process to German supervision. As a politician herself, Merkel would have known that no government can be seen to accept such a submission of its sovereignty, and certainly not one like Greece, where the political temperature is already high. I believe this was her way of telling Greece, “I want you to leave the Eurozone, but you won’t hear me saying it.” To ensure this, she made Greece a proposal that was politically unacceptable.

Under this scenario, Merkel is making a Greek debt default a virtual certainty; my sense is she is using this time to shore up German banks against the impact of such a collapse.  Of course, there will be many unpredictable outcomes of such a development, and she cannot guard against all of them. However, given the depth of the European debt crisis, there does not seem to be a good solution. Merkel has to choose what she thinks is the least bad solution.

If she does allow a Greek default, risk will switch off like a 1970s Delhi black-out. 

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