Monday, February 28, 2011
U.S. WILL WIN FROM MIDDLE EAST DOMINO / THE FINANCIAL TIMES MARKET ANALYSIS ( A MUST READ )
US will win from Middle East domino effect
By Scott Minerd
Published: February 28 2011 13:43
Mark Twain famously said that “history doesn’t repeat itself, but it does rhyme”. As investors consider the ramifications of turmoil in the Middle East and North Africa, I can’t help but reflect on the political revolutions that swept through Eastern Europe and the Soviet Union in the early 1990s.
During that period, the winds of change that brought the collapse of communist regimes also precipitated turmoil in the financial markets and severe recessions. Along these lines, I believe the events in the Middle East-North Africa region today will perpetuate an economic domino effect that may result in dramatic shifts across the investment landscape over the course of the next year.
As we have already begun to see, the mere threat of a disruption to the world’s oil supply has caused the price of crude oil to spike. Short of a threat to Iran or Saudi Arabia, oil at $200 per barrel is unlikely. Nonetheless, as the democracy movement spreads across the Middle East, there is a very real prospect that perceived pressures may push prices to $125 or higher.
If energy prices linger at such elevated levels, the next domino will be heightened inflationary pressures around the world, particularly in emerging markets. Prior to the events in the Middle East, the Bric countries – Brazil, Russia, India, and China – needed to take dramatic policy actions to cool overheating markets and fight inflation. If energy prices surge, there will be even greater pressure for meaningful monetary policy tightening across all emerging market economies in 2011.
We’ve already seen this in Russia, where a surprise rate increase was announced on February 25. I believe this is a sign of things to come for emerging market economies, especially China and India, which currently struggle with inflation rates well above short-term interest rates.
Restrictive monetary policy will lead to an economic slowdown in emerging markets. And, since it’s seldom a good bet to fight against central banks, emerging market equities are not the place to be for the next few quarters. For investors looking at these markets, the next entry point should become apparent once there has been a material increase in interest rates and commodity prices begin to trend downward.
Returning to the domino theory, an economic slowdown in emerging markets will be especially painful for Germany, whose economic rebound in 2010 was fuelled by emerging market demand for German autos, industrial products, and machinery.
As German economic horsepower decreases, the slowdown will cascade into other European economies. If German gross domestic product falls to below 2 per cent, which I think is highly likely, then growth for the entire euro area will likely dip below 1 per cent, or possibly even contract. This means the euro area could find itself on the brink of another recession and the European Central Bank would be forced into accommodative monetary policy.
After all these dominos fall, global investors will likely find themselves in a world that looks like this: the Middle East is highly unstable, emerging market economies are slowing, and the crisis in Europe has been exacerbated by shrinking exports, leading to a decline in the value of the euro.
Against this landscape, the US economy and dollar-denominated financial assets will look increasingly attractive on a relative value basis. By the second half of the year I expect to see a rebound in the dollar, lower bond yields, and the outperformance of US equities relative to Europe and most of the emerging market countries, with the possible exception of Russia. The flight to safety play will also be good for gold prices, which continue to be in a generational bull market despite the recent consolidation (which I view as healthy).
Finally, what may be most ironic about the fact that the US ends up benefiting from this series of events is that the domino which set this scenario in motion across the globe – from the Middle East to Asia and then Europe – was actually the Federal Reserve’s policy of quantitative easing.
By printing almost $2,000bn dollars and using that money to buy assets, the United States created a rising tide of liquidity that has lifted all asset prices, including commodities, and more specifically agricultural products. Just as chronic food shortages were a major catalyst in the 1991 revolution in the Soviet Union, rising food prices have been a catalyst for the social unrest in the Middle East and North Africa.
Regardless of who’s to be blamed (or credited, depending on your perspective) for prompting the social unrest that has swelled into waves of democratic revolutions washing over the Middle East, the moral of the story for investors is that the US financial markets should prove to be one of the most attractive places to invest in 2011.
Scott Minerd is chief investment officer at Guggenheim Partners
Copyright The Financial Times Limited 2011.
U.S. WILL WIN FROM MIDDLE EAST DOMINO / THE FINANCIAL TIMES MARKET ANALYSIS ( A MUST READ )
US will win from Middle East domino effect
By Scott Minerd
Published: February 28 2011 13:43
Mark Twain famously said that “history doesn’t repeat itself, but it does rhyme”. As investors consider the ramifications of turmoil in the Middle East and North Africa, I can’t help but reflect on the political revolutions that swept through Eastern Europe and the Soviet Union in the early 1990s.
During that period, the winds of change that brought the collapse of communist regimes also precipitated turmoil in the financial markets and severe recessions. Along these lines, I believe the events in the Middle East-North Africa region today will perpetuate an economic domino effect that may result in dramatic shifts across the investment landscape over the course of the next year.
As we have already begun to see, the mere threat of a disruption to the world’s oil supply has caused the price of crude oil to spike. Short of a threat to Iran or Saudi Arabia, oil at $200 per barrel is unlikely. Nonetheless, as the democracy movement spreads across the Middle East, there is a very real prospect that perceived pressures may push prices to $125 or higher.
If energy prices linger at such elevated levels, the next domino will be heightened inflationary pressures around the world, particularly in emerging markets. Prior to the events in the Middle East, the Bric countries – Brazil, Russia, India, and China – needed to take dramatic policy actions to cool overheating markets and fight inflation. If energy prices surge, there will be even greater pressure for meaningful monetary policy tightening across all emerging market economies in 2011.
We’ve already seen this in Russia, where a surprise rate increase was announced on February 25. I believe this is a sign of things to come for emerging market economies, especially China and India, which currently struggle with inflation rates well above short-term interest rates.
Restrictive monetary policy will lead to an economic slowdown in emerging markets. And, since it’s seldom a good bet to fight against central banks, emerging market equities are not the place to be for the next few quarters. For investors looking at these markets, the next entry point should become apparent once there has been a material increase in interest rates and commodity prices begin to trend downward.
Returning to the domino theory, an economic slowdown in emerging markets will be especially painful for Germany, whose economic rebound in 2010 was fuelled by emerging market demand for German autos, industrial products, and machinery.
As German economic horsepower decreases, the slowdown will cascade into other European economies. If German gross domestic product falls to below 2 per cent, which I think is highly likely, then growth for the entire euro area will likely dip below 1 per cent, or possibly even contract. This means the euro area could find itself on the brink of another recession and the European Central Bank would be forced into accommodative monetary policy.
After all these dominos fall, global investors will likely find themselves in a world that looks like this: the Middle East is highly unstable, emerging market economies are slowing, and the crisis in Europe has been exacerbated by shrinking exports, leading to a decline in the value of the euro.
Against this landscape, the US economy and dollar-denominated financial assets will look increasingly attractive on a relative value basis. By the second half of the year I expect to see a rebound in the dollar, lower bond yields, and the outperformance of US equities relative to Europe and most of the emerging market countries, with the possible exception of Russia. The flight to safety play will also be good for gold prices, which continue to be in a generational bull market despite the recent consolidation (which I view as healthy).
Finally, what may be most ironic about the fact that the US ends up benefiting from this series of events is that the domino which set this scenario in motion across the globe – from the Middle East to Asia and then Europe – was actually the Federal Reserve’s policy of quantitative easing.
By printing almost $2,000bn dollars and using that money to buy assets, the United States created a rising tide of liquidity that has lifted all asset prices, including commodities, and more specifically agricultural products. Just as chronic food shortages were a major catalyst in the 1991 revolution in the Soviet Union, rising food prices have been a catalyst for the social unrest in the Middle East and North Africa.
Regardless of who’s to be blamed (or credited, depending on your perspective) for prompting the social unrest that has swelled into waves of democratic revolutions washing over the Middle East, the moral of the story for investors is that the US financial markets should prove to be one of the most attractive places to invest in 2011.
Scott Minerd is chief investment officer at Guggenheim Partners
Copyright The Financial Times Limited 2011.
GOLD, DOLLAR, STOCKS & SENTIMENT AT MAJOR PIVOT POINT / THEGOLDANDOILGUY.COM ( A MUST READ )
Gold, Dollar, Stocks & Sentiment at Major Pivot Point
Sunday, February 27th, 2011 at 9:45 pm
So far 2011 has been an interesting to say the least. Stocks and commodities have been jumping around with high volatility generating mixed trading signals. This choppy price action typically indicates trends are in their late stages. The late stages of a trend is very difficult to trade because volatility rises meaning larger day to day price swings, and at any time the price could either drop like a rock or go parabolic surging higher in value. Generally the largest moves take place during the final 10% of trend, but with a sharp rise in price keep in mind the day to day gyrations are much larger than normal, hence the false buy and sell signals back to back on some investment vehicles.
Taking a look at the charts it’s clear that we are on the edge of some sizable moves in both stocks and commodities.
It’s just a matter of time before a correction is confirmed or this current pullback in stocks is just a dip (buying opportunity). I am in favor of the longer term trend at work here (bull market) but it only takes a 1 or 2 bid down days and that could change.
SPY (SP500 Price Action) – 60 Minute Chart
This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?
Currently I am bullish but the next couple trading sessions could confirm my bullish view or a correction could be unfolding. Until then, we must remain cautious.
.
.
.
Price Of Gold – Weekly Chart
Gold has staged a strong recovery in the past four weeks. But it has yet to break to a new high. I do feel as though it will head higher because of the way silver has been performing (new highs). But it is very possible we get a pause for a week or two before continuing higher.
Because of the international concerns in the Middle East both gold and silver should hold up well even if the US dollar bounces off support. But, if the US dollar breaks down below its key support level we could see stocks and commodities go parabolic and surge higher in the coming months. It’s going to be an interesting year to say the least.
.
.
Dollar Weekly Chart
This long term view of the dollar shows a MAJOR level which if penetrated will cause some very large movements across the board (stocks, commodities and currencies).
In short, a breakdown will most likely cause a spike in stocks and commodities across the board which could last up to 12 months in length. On the flip side a bounce from this support zone will trigger a pullback in both stocks and commodities. This weekly chart is something we must keep our eye on each Friday as the weekly candle closes on the chart.
...
.
Weekend Trend Report:
In short, 2011 has been interesting but trading wise it’s has yet to provide any real low risk trade setups which I am willing to put much money on. There are times when trading is great and times when it’s not. It all comes down to managing money/risk by trading small during choppy times (late stages of trends), and times when we add to positions as they mature building a sizable portfolio of investments which I think will start to unfold over the next few months.
I continue to analyze the market probing it for small positions as this market flashes short term buy and sell signals.
Last week we saw a lot of emotional trading and that typically indicates large daily price swings should continue for some time still so keep trades small and manage you positions.
Chris Vermeulen
Sunday, February 27th, 2011 at 9:45 pm
So far 2011 has been an interesting to say the least. Stocks and commodities have been jumping around with high volatility generating mixed trading signals. This choppy price action typically indicates trends are in their late stages. The late stages of a trend is very difficult to trade because volatility rises meaning larger day to day price swings, and at any time the price could either drop like a rock or go parabolic surging higher in value. Generally the largest moves take place during the final 10% of trend, but with a sharp rise in price keep in mind the day to day gyrations are much larger than normal, hence the false buy and sell signals back to back on some investment vehicles.
Taking a look at the charts it’s clear that we are on the edge of some sizable moves in both stocks and commodities.
It’s just a matter of time before a correction is confirmed or this current pullback in stocks is just a dip (buying opportunity). I am in favor of the longer term trend at work here (bull market) but it only takes a 1 or 2 bid down days and that could change.
SPY (SP500 Price Action) – 60 Minute Chart
This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?
Currently I am bullish but the next couple trading sessions could confirm my bullish view or a correction could be unfolding. Until then, we must remain cautious.
.
.
.
Price Of Gold – Weekly Chart
Gold has staged a strong recovery in the past four weeks. But it has yet to break to a new high. I do feel as though it will head higher because of the way silver has been performing (new highs). But it is very possible we get a pause for a week or two before continuing higher.
Because of the international concerns in the Middle East both gold and silver should hold up well even if the US dollar bounces off support. But, if the US dollar breaks down below its key support level we could see stocks and commodities go parabolic and surge higher in the coming months. It’s going to be an interesting year to say the least.
.
.
Dollar Weekly Chart
This long term view of the dollar shows a MAJOR level which if penetrated will cause some very large movements across the board (stocks, commodities and currencies).
In short, a breakdown will most likely cause a spike in stocks and commodities across the board which could last up to 12 months in length. On the flip side a bounce from this support zone will trigger a pullback in both stocks and commodities. This weekly chart is something we must keep our eye on each Friday as the weekly candle closes on the chart.
...
.
Weekend Trend Report:
In short, 2011 has been interesting but trading wise it’s has yet to provide any real low risk trade setups which I am willing to put much money on. There are times when trading is great and times when it’s not. It all comes down to managing money/risk by trading small during choppy times (late stages of trends), and times when we add to positions as they mature building a sizable portfolio of investments which I think will start to unfold over the next few months.
I continue to analyze the market probing it for small positions as this market flashes short term buy and sell signals.
Last week we saw a lot of emotional trading and that typically indicates large daily price swings should continue for some time still so keep trades small and manage you positions.
Chris Vermeulen
GOLD, DOLLAR, STOCKS & SENTIMENT AT MAJOR PIVOT POINT / THEGOLDANDOILGUY.COM ( A MUST READ )
Gold, Dollar, Stocks & Sentiment at Major Pivot Point
Sunday, February 27th, 2011 at 9:45 pm
So far 2011 has been an interesting to say the least. Stocks and commodities have been jumping around with high volatility generating mixed trading signals. This choppy price action typically indicates trends are in their late stages. The late stages of a trend is very difficult to trade because volatility rises meaning larger day to day price swings, and at any time the price could either drop like a rock or go parabolic surging higher in value. Generally the largest moves take place during the final 10% of trend, but with a sharp rise in price keep in mind the day to day gyrations are much larger than normal, hence the false buy and sell signals back to back on some investment vehicles.
Taking a look at the charts it’s clear that we are on the edge of some sizable moves in both stocks and commodities.
It’s just a matter of time before a correction is confirmed or this current pullback in stocks is just a dip (buying opportunity). I am in favor of the longer term trend at work here (bull market) but it only takes a 1 or 2 bid down days and that could change.
SPY (SP500 Price Action) – 60 Minute Chart
This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?
Currently I am bullish but the next couple trading sessions could confirm my bullish view or a correction could be unfolding. Until then, we must remain cautious.
.
.
.
Price Of Gold – Weekly Chart
Gold has staged a strong recovery in the past four weeks. But it has yet to break to a new high. I do feel as though it will head higher because of the way silver has been performing (new highs). But it is very possible we get a pause for a week or two before continuing higher.
Because of the international concerns in the Middle East both gold and silver should hold up well even if the US dollar bounces off support. But, if the US dollar breaks down below its key support level we could see stocks and commodities go parabolic and surge higher in the coming months. It’s going to be an interesting year to say the least.
.
.
Dollar Weekly Chart
This long term view of the dollar shows a MAJOR level which if penetrated will cause some very large movements across the board (stocks, commodities and currencies).
In short, a breakdown will most likely cause a spike in stocks and commodities across the board which could last up to 12 months in length. On the flip side a bounce from this support zone will trigger a pullback in both stocks and commodities. This weekly chart is something we must keep our eye on each Friday as the weekly candle closes on the chart.
...
.
Weekend Trend Report:
In short, 2011 has been interesting but trading wise it’s has yet to provide any real low risk trade setups which I am willing to put much money on. There are times when trading is great and times when it’s not. It all comes down to managing money/risk by trading small during choppy times (late stages of trends), and times when we add to positions as they mature building a sizable portfolio of investments which I think will start to unfold over the next few months.
I continue to analyze the market probing it for small positions as this market flashes short term buy and sell signals.
Last week we saw a lot of emotional trading and that typically indicates large daily price swings should continue for some time still so keep trades small and manage you positions.
Chris Vermeulen
Sunday, February 27th, 2011 at 9:45 pm
So far 2011 has been an interesting to say the least. Stocks and commodities have been jumping around with high volatility generating mixed trading signals. This choppy price action typically indicates trends are in their late stages. The late stages of a trend is very difficult to trade because volatility rises meaning larger day to day price swings, and at any time the price could either drop like a rock or go parabolic surging higher in value. Generally the largest moves take place during the final 10% of trend, but with a sharp rise in price keep in mind the day to day gyrations are much larger than normal, hence the false buy and sell signals back to back on some investment vehicles.
Taking a look at the charts it’s clear that we are on the edge of some sizable moves in both stocks and commodities.
It’s just a matter of time before a correction is confirmed or this current pullback in stocks is just a dip (buying opportunity). I am in favor of the longer term trend at work here (bull market) but it only takes a 1 or 2 bid down days and that could change.
SPY (SP500 Price Action) – 60 Minute Chart
This chart shows intraday price action with my market internals. It is signaling a short term bottom within the overall uptrend on the equities market. The big question is if this is a just an opportunity to buy into this Fed induced bull market or the start of a larger correction?
Currently I am bullish but the next couple trading sessions could confirm my bullish view or a correction could be unfolding. Until then, we must remain cautious.
.
.
.
Price Of Gold – Weekly Chart
Gold has staged a strong recovery in the past four weeks. But it has yet to break to a new high. I do feel as though it will head higher because of the way silver has been performing (new highs). But it is very possible we get a pause for a week or two before continuing higher.
Because of the international concerns in the Middle East both gold and silver should hold up well even if the US dollar bounces off support. But, if the US dollar breaks down below its key support level we could see stocks and commodities go parabolic and surge higher in the coming months. It’s going to be an interesting year to say the least.
.
.
Dollar Weekly Chart
This long term view of the dollar shows a MAJOR level which if penetrated will cause some very large movements across the board (stocks, commodities and currencies).
In short, a breakdown will most likely cause a spike in stocks and commodities across the board which could last up to 12 months in length. On the flip side a bounce from this support zone will trigger a pullback in both stocks and commodities. This weekly chart is something we must keep our eye on each Friday as the weekly candle closes on the chart.
...
.
Weekend Trend Report:
In short, 2011 has been interesting but trading wise it’s has yet to provide any real low risk trade setups which I am willing to put much money on. There are times when trading is great and times when it’s not. It all comes down to managing money/risk by trading small during choppy times (late stages of trends), and times when we add to positions as they mature building a sizable portfolio of investments which I think will start to unfold over the next few months.
I continue to analyze the market probing it for small positions as this market flashes short term buy and sell signals.
Last week we saw a lot of emotional trading and that typically indicates large daily price swings should continue for some time still so keep trades small and manage you positions.
Chris Vermeulen
SAY NO TO GERMANY´S COMPETITIVENESS PACT / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )
Say no to Germany’s competitiveness pact
By Wolfgang Münchau
Published: February 27 2011 21:00
It is time to stop pretending that we are about to see a “grand bargain” for the eurozone in March. Last week, the political developments in Germany shifted dramatically in the wrong direction. The Bundesbank, the parliament, the small business community and influential academics have all come out openly against an extension of the various support mechanisms. German society as a whole is in open revolt against the eurozone.
The single most important event was the decision by the three coalition parties in the Bundestag to reject, categorically, bond purchases by the European stability mechanism. The ESM will be the permanent anti-crisis institution from 2013. The Bundesbank came to a similar conclusion in its monthly report. On Thursday, 189 German economists wrote a letter to a newspaper denouncing the ESM, calling for immediate bankruptcy proceedings of insolvent eurozone states. It is no longer just the constitutional court that puts a break on the process.
In last week’s column, I tried to explain the origins of that sentiment. Today, I will focus on the consequences. The best outcome, in my view, would be a failure of the current crisis resolution strategy, followed by a complete rebooting. The worst would be a never-ending stand-off, followed by a financial cardiac arrest. The most likely outcome is a very small compromise of the kind that resolves nothing.
The current bargaining revolves around four pillars: current crisis management; the ESM; a new stability pact with budgetary surveillance; and co-ordination of social and economic policies. Negotiations on the ESM’s funding have been going well, as have discussions on the stability pact. But there is no agreement on bond purchases, and no progress at all on current crisis management.
The least sturdy of the four pillars is policy co-ordination. Chancellor Angela Merkel insists on a German-inspired competitiveness pact as a quid pro quo for Germany’s readiness to provide credit guarantees. But how should other countries respond?
My answer is: reject it. I would recommend eurozone member states to veto the competitiveness pact, even if that jeopardises the entire package. If Germany cannot deliver its side of this quid pro quo, it is not clear to me why anybody would accept a loss of sovereignty – which is effectively what policy co-ordination would imply. The only reason to accept such a loss of sovereignty would be the prize of an ever closer economic union. But that would have to include a common eurozone bond at one point. Through bond purchases the ESM would eventually mutate into a European debt agency, the financial counterpart of an economic union. But if the ESM has its wings clipped from the outset, this will never happen.
There is also the problem inherent in the purely inter-governmental system of policy co-ordination that France and Germany are offering. In such a system, the large countries impose their will on the small. Just witness the arrogance with which Ms Merkel and French president Nicolas Sarkozy presented their six-point competitiveness pact at the last European Council.
But would the financial markets not panic at a failure to agree a deal? Quite possibly. But nobody should fool themselves into thinking that the reaction to a fudged deal would be better. It might come a little later, but it would come. And then you are in a much worse position. Once you get a bad deal in March, there is no way you can crawl back to the Bundestag for a top-up loan in May.
The reason we are in this pickle is, ironically, the lack of market pressure. With their enthusiasm about a deal, the financial markets might have killed it. Eurozone countries only act when under immediate pressure. Germany, for example, has a massive problem in its state-owned banking sector, but apart from a reluctant restructuring of WestLB, this is currently no policy priority. The Bundesbank tells everyone that it is not happy about transparency in stress tests, and there is no law in place to force recapitalisations. The relatively calm market situation also explains why 189 economists find the time to write a long letter, criticising what they clearly consider to be the resolution of someone else’s crisis. I am afraid that without a force majeure event, there will be no crisis resolution. A good example is the Spanish recapitalisation of the savings banks. The Spanish government would never have had the courage to force this without the fear of being next in line for a speculative attack.
The EU’s crisis resolution strategy is to draw attention away from the underlying causes of the crisis: that you cannot have nationally controlled and undercapitalised banking systems in a monetary union with structural current account imbalances. The difficult job is to translate this technical statement into a language understood by politicians and their constituents, and to do so without lying. This is not a fiscal crisis. It is not a crisis of the south. It is a crisis of the private sector and of undercapitalised banks. It is as much a German crisis as it is a Spanish crisis. This acknowledgement must be the starting point of any effective resolution system. A veto in March is thus a necessary first step in crisis resolution.
Copyright The Financial Times Limited 2011.
By Wolfgang Münchau
Published: February 27 2011 21:00
It is time to stop pretending that we are about to see a “grand bargain” for the eurozone in March. Last week, the political developments in Germany shifted dramatically in the wrong direction. The Bundesbank, the parliament, the small business community and influential academics have all come out openly against an extension of the various support mechanisms. German society as a whole is in open revolt against the eurozone.
The single most important event was the decision by the three coalition parties in the Bundestag to reject, categorically, bond purchases by the European stability mechanism. The ESM will be the permanent anti-crisis institution from 2013. The Bundesbank came to a similar conclusion in its monthly report. On Thursday, 189 German economists wrote a letter to a newspaper denouncing the ESM, calling for immediate bankruptcy proceedings of insolvent eurozone states. It is no longer just the constitutional court that puts a break on the process.
In last week’s column, I tried to explain the origins of that sentiment. Today, I will focus on the consequences. The best outcome, in my view, would be a failure of the current crisis resolution strategy, followed by a complete rebooting. The worst would be a never-ending stand-off, followed by a financial cardiac arrest. The most likely outcome is a very small compromise of the kind that resolves nothing.
The current bargaining revolves around four pillars: current crisis management; the ESM; a new stability pact with budgetary surveillance; and co-ordination of social and economic policies. Negotiations on the ESM’s funding have been going well, as have discussions on the stability pact. But there is no agreement on bond purchases, and no progress at all on current crisis management.
The least sturdy of the four pillars is policy co-ordination. Chancellor Angela Merkel insists on a German-inspired competitiveness pact as a quid pro quo for Germany’s readiness to provide credit guarantees. But how should other countries respond?
My answer is: reject it. I would recommend eurozone member states to veto the competitiveness pact, even if that jeopardises the entire package. If Germany cannot deliver its side of this quid pro quo, it is not clear to me why anybody would accept a loss of sovereignty – which is effectively what policy co-ordination would imply. The only reason to accept such a loss of sovereignty would be the prize of an ever closer economic union. But that would have to include a common eurozone bond at one point. Through bond purchases the ESM would eventually mutate into a European debt agency, the financial counterpart of an economic union. But if the ESM has its wings clipped from the outset, this will never happen.
There is also the problem inherent in the purely inter-governmental system of policy co-ordination that France and Germany are offering. In such a system, the large countries impose their will on the small. Just witness the arrogance with which Ms Merkel and French president Nicolas Sarkozy presented their six-point competitiveness pact at the last European Council.
But would the financial markets not panic at a failure to agree a deal? Quite possibly. But nobody should fool themselves into thinking that the reaction to a fudged deal would be better. It might come a little later, but it would come. And then you are in a much worse position. Once you get a bad deal in March, there is no way you can crawl back to the Bundestag for a top-up loan in May.
The reason we are in this pickle is, ironically, the lack of market pressure. With their enthusiasm about a deal, the financial markets might have killed it. Eurozone countries only act when under immediate pressure. Germany, for example, has a massive problem in its state-owned banking sector, but apart from a reluctant restructuring of WestLB, this is currently no policy priority. The Bundesbank tells everyone that it is not happy about transparency in stress tests, and there is no law in place to force recapitalisations. The relatively calm market situation also explains why 189 economists find the time to write a long letter, criticising what they clearly consider to be the resolution of someone else’s crisis. I am afraid that without a force majeure event, there will be no crisis resolution. A good example is the Spanish recapitalisation of the savings banks. The Spanish government would never have had the courage to force this without the fear of being next in line for a speculative attack.
The EU’s crisis resolution strategy is to draw attention away from the underlying causes of the crisis: that you cannot have nationally controlled and undercapitalised banking systems in a monetary union with structural current account imbalances. The difficult job is to translate this technical statement into a language understood by politicians and their constituents, and to do so without lying. This is not a fiscal crisis. It is not a crisis of the south. It is a crisis of the private sector and of undercapitalised banks. It is as much a German crisis as it is a Spanish crisis. This acknowledgement must be the starting point of any effective resolution system. A veto in March is thus a necessary first step in crisis resolution.
Copyright The Financial Times Limited 2011.
SAY NO TO GERMANY´S COMPETITIVENESS PACT / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )
Say no to Germany’s competitiveness pact
By Wolfgang Münchau
Published: February 27 2011 21:00
It is time to stop pretending that we are about to see a “grand bargain” for the eurozone in March. Last week, the political developments in Germany shifted dramatically in the wrong direction. The Bundesbank, the parliament, the small business community and influential academics have all come out openly against an extension of the various support mechanisms. German society as a whole is in open revolt against the eurozone.
The single most important event was the decision by the three coalition parties in the Bundestag to reject, categorically, bond purchases by the European stability mechanism. The ESM will be the permanent anti-crisis institution from 2013. The Bundesbank came to a similar conclusion in its monthly report. On Thursday, 189 German economists wrote a letter to a newspaper denouncing the ESM, calling for immediate bankruptcy proceedings of insolvent eurozone states. It is no longer just the constitutional court that puts a break on the process.
In last week’s column, I tried to explain the origins of that sentiment. Today, I will focus on the consequences. The best outcome, in my view, would be a failure of the current crisis resolution strategy, followed by a complete rebooting. The worst would be a never-ending stand-off, followed by a financial cardiac arrest. The most likely outcome is a very small compromise of the kind that resolves nothing.
The current bargaining revolves around four pillars: current crisis management; the ESM; a new stability pact with budgetary surveillance; and co-ordination of social and economic policies. Negotiations on the ESM’s funding have been going well, as have discussions on the stability pact. But there is no agreement on bond purchases, and no progress at all on current crisis management.
The least sturdy of the four pillars is policy co-ordination. Chancellor Angela Merkel insists on a German-inspired competitiveness pact as a quid pro quo for Germany’s readiness to provide credit guarantees. But how should other countries respond?
My answer is: reject it. I would recommend eurozone member states to veto the competitiveness pact, even if that jeopardises the entire package. If Germany cannot deliver its side of this quid pro quo, it is not clear to me why anybody would accept a loss of sovereignty – which is effectively what policy co-ordination would imply. The only reason to accept such a loss of sovereignty would be the prize of an ever closer economic union. But that would have to include a common eurozone bond at one point. Through bond purchases the ESM would eventually mutate into a European debt agency, the financial counterpart of an economic union. But if the ESM has its wings clipped from the outset, this will never happen.
There is also the problem inherent in the purely inter-governmental system of policy co-ordination that France and Germany are offering. In such a system, the large countries impose their will on the small. Just witness the arrogance with which Ms Merkel and French president Nicolas Sarkozy presented their six-point competitiveness pact at the last European Council.
But would the financial markets not panic at a failure to agree a deal? Quite possibly. But nobody should fool themselves into thinking that the reaction to a fudged deal would be better. It might come a little later, but it would come. And then you are in a much worse position. Once you get a bad deal in March, there is no way you can crawl back to the Bundestag for a top-up loan in May.
The reason we are in this pickle is, ironically, the lack of market pressure. With their enthusiasm about a deal, the financial markets might have killed it. Eurozone countries only act when under immediate pressure. Germany, for example, has a massive problem in its state-owned banking sector, but apart from a reluctant restructuring of WestLB, this is currently no policy priority. The Bundesbank tells everyone that it is not happy about transparency in stress tests, and there is no law in place to force recapitalisations. The relatively calm market situation also explains why 189 economists find the time to write a long letter, criticising what they clearly consider to be the resolution of someone else’s crisis. I am afraid that without a force majeure event, there will be no crisis resolution. A good example is the Spanish recapitalisation of the savings banks. The Spanish government would never have had the courage to force this without the fear of being next in line for a speculative attack.
The EU’s crisis resolution strategy is to draw attention away from the underlying causes of the crisis: that you cannot have nationally controlled and undercapitalised banking systems in a monetary union with structural current account imbalances. The difficult job is to translate this technical statement into a language understood by politicians and their constituents, and to do so without lying. This is not a fiscal crisis. It is not a crisis of the south. It is a crisis of the private sector and of undercapitalised banks. It is as much a German crisis as it is a Spanish crisis. This acknowledgement must be the starting point of any effective resolution system. A veto in March is thus a necessary first step in crisis resolution.
Copyright The Financial Times Limited 2011.
By Wolfgang Münchau
Published: February 27 2011 21:00
It is time to stop pretending that we are about to see a “grand bargain” for the eurozone in March. Last week, the political developments in Germany shifted dramatically in the wrong direction. The Bundesbank, the parliament, the small business community and influential academics have all come out openly against an extension of the various support mechanisms. German society as a whole is in open revolt against the eurozone.
The single most important event was the decision by the three coalition parties in the Bundestag to reject, categorically, bond purchases by the European stability mechanism. The ESM will be the permanent anti-crisis institution from 2013. The Bundesbank came to a similar conclusion in its monthly report. On Thursday, 189 German economists wrote a letter to a newspaper denouncing the ESM, calling for immediate bankruptcy proceedings of insolvent eurozone states. It is no longer just the constitutional court that puts a break on the process.
In last week’s column, I tried to explain the origins of that sentiment. Today, I will focus on the consequences. The best outcome, in my view, would be a failure of the current crisis resolution strategy, followed by a complete rebooting. The worst would be a never-ending stand-off, followed by a financial cardiac arrest. The most likely outcome is a very small compromise of the kind that resolves nothing.
The current bargaining revolves around four pillars: current crisis management; the ESM; a new stability pact with budgetary surveillance; and co-ordination of social and economic policies. Negotiations on the ESM’s funding have been going well, as have discussions on the stability pact. But there is no agreement on bond purchases, and no progress at all on current crisis management.
The least sturdy of the four pillars is policy co-ordination. Chancellor Angela Merkel insists on a German-inspired competitiveness pact as a quid pro quo for Germany’s readiness to provide credit guarantees. But how should other countries respond?
My answer is: reject it. I would recommend eurozone member states to veto the competitiveness pact, even if that jeopardises the entire package. If Germany cannot deliver its side of this quid pro quo, it is not clear to me why anybody would accept a loss of sovereignty – which is effectively what policy co-ordination would imply. The only reason to accept such a loss of sovereignty would be the prize of an ever closer economic union. But that would have to include a common eurozone bond at one point. Through bond purchases the ESM would eventually mutate into a European debt agency, the financial counterpart of an economic union. But if the ESM has its wings clipped from the outset, this will never happen.
There is also the problem inherent in the purely inter-governmental system of policy co-ordination that France and Germany are offering. In such a system, the large countries impose their will on the small. Just witness the arrogance with which Ms Merkel and French president Nicolas Sarkozy presented their six-point competitiveness pact at the last European Council.
But would the financial markets not panic at a failure to agree a deal? Quite possibly. But nobody should fool themselves into thinking that the reaction to a fudged deal would be better. It might come a little later, but it would come. And then you are in a much worse position. Once you get a bad deal in March, there is no way you can crawl back to the Bundestag for a top-up loan in May.
The reason we are in this pickle is, ironically, the lack of market pressure. With their enthusiasm about a deal, the financial markets might have killed it. Eurozone countries only act when under immediate pressure. Germany, for example, has a massive problem in its state-owned banking sector, but apart from a reluctant restructuring of WestLB, this is currently no policy priority. The Bundesbank tells everyone that it is not happy about transparency in stress tests, and there is no law in place to force recapitalisations. The relatively calm market situation also explains why 189 economists find the time to write a long letter, criticising what they clearly consider to be the resolution of someone else’s crisis. I am afraid that without a force majeure event, there will be no crisis resolution. A good example is the Spanish recapitalisation of the savings banks. The Spanish government would never have had the courage to force this without the fear of being next in line for a speculative attack.
The EU’s crisis resolution strategy is to draw attention away from the underlying causes of the crisis: that you cannot have nationally controlled and undercapitalised banking systems in a monetary union with structural current account imbalances. The difficult job is to translate this technical statement into a language understood by politicians and their constituents, and to do so without lying. This is not a fiscal crisis. It is not a crisis of the south. It is a crisis of the private sector and of undercapitalised banks. It is as much a German crisis as it is a Spanish crisis. This acknowledgement must be the starting point of any effective resolution system. A veto in March is thus a necessary first step in crisis resolution.
Copyright The Financial Times Limited 2011.
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