Another day in which it became clear that the European Council is totally unsuited to running a large and complex monetary union. They are all at each others’ throats. Jean-Claude Juncker, the head of the eurogroup has accused Angela Merkel of being “un-European” in an interview with Die Zeit
, and accused her of not even having looked at his proposal for a common European bond. He also called the German position somewhat simplistic, and said Germany was increasingly less interested in the pursuit of Europe’s common welfare.
Merkel retorted that a common bond would give the wrong incentives, and was not compatible with the Treaties. A bond would make it harder for member states to consolidate their budgets (which shows again that the lady, and her advisers, have not quite grasped what this crisis is about. To Merkel, deficit consolidation is the solution to every economic problem.)
Der Spiegel said the euro-crisis is turning into a wider EU crisis. The FT talked about “the most dramatic demonstration to date of the worsening tempers within the EU”. Portugal and Italy support Juncker; Austria and the Netherlands support Merkel. Der Spiegel also talked to unnamed coalition member, who accused Juncker of playing his own game. Luxembourg would not be negatively affected by a Eurobond, as it has no borrowings, while Germany would suffer from an increase in interest rates on its borrowings. That would cost Germany half a billion Euros. (But is that not peanuts compared to the alternative that Germany bails out country after country. Berlin is obviously not prepared for what it is likely to hit it, when, Greece, Ireland and Portugal default.)
German rate rises inexorably, as third bond auction in a row fails
We think this is one of the most underreported stories of the last month – the gradual deterioration in German 10 year yields. Yesterday, a bond auction flopped, for the third time in succession, as investors fear the extent of Germany’s liability for other eurozone countries. That also means that the eurozone spreads are falling. But this is no cause for joy.
Incidentally, the German argument that a European bond would drive up interest rates is to some extent disproved in the following graphic. Uncertainty over the future of the eurozone has very much the same effect – as the bonds spreads are narrowing, but not in a good way. The yields on German bonds is rising, while the yields of the other bonds remain high.
Brian Lenihan defends decision to mollycoddle bondholders
This is from the FT. It was the EU that rejected a bondholder haircuts for Irish banks, and leaving Ireland no choice but to pursue the present strategy. This is what Brian Lenihan, the Irish finance minister, has to say:
“I raised the question of whether we should have aggressive discounts of their bonds in the course of the discussions and the European Central Bank and European Commission were not prepared to support that approach... A small country like Ireland cannot engage in a default without the support of the [ECB] because you have to have the bank loaded with cash while you’re engaging in such a default and its not feasible for us to do this. We really need to face up to this because we’ve allowed public discussion to become dominated by it. It’s done huge damage to the country and people shouldn’t be surprised there is a huge erosion of trust in the Irish banking system when we’ve had endless debate about whether we should be defaulting in the payment of our obligations.”
Dominique Strauss-Kahn says crisis not over
The IMF chief says that the European anti-crisis response has been insufficient to stem the crisis, and that the future remains more uncertain than ever, according to La Repubblica. It was necessary to reconstruct the governance of the eurozone, rather than wait for a return of calm in the markets. He said a change of the rules was insufficient. Also needed are changes in the supervisory structure of banks (imply that the European legislation is not going far enough), and crisis resolution. He said when the next crisis, we have to be ready, according to La Repubblica.
Andrew Duff on fiscal union
Andrew Duff MEP writes in the FT that the EU was “slithering” into a fiscal union. This is not an optimal process for sure. “What is happening is not very democratic and it will take years for politicians to explain and justify the process by which fiscal union came about.” He writes that fiscal union is not the right answer to the crisis, but the only answer. He said without it, the euro will fail, as interest rates will continue to rise, and affect growth. Combined with low productivity, disaster is the result. He supports Germany in one respect. Any move towards fiscal union requires treaty change. But this treaty must do more than just create the ground for the European Stablity Mechanims. It must include a complete change in the euro’s governance framework, with a small fiscal union that accounts for some 2.5% of GDP.
Gordon Brown warns of a major crisis next year
Gordon Brown (remember him?) yesterday made a number of media appearance to sell his new book. In an interview with the BBC, hat tip Reuters, he said: "I sense that in the first few months of 2011, we've got a major crisis in the euro area, because people have not looked at the three different factors at work together. You've got fiscal deficits obviously, ... but you know you've got massive banking liabilities in the euro area, and that's not only the peripheral area, that's the core areas of Europe. The structural reforms that are necessary to make a single currency area work have not been completed. And therefore you've got to have a high noon, you've got to make people come together."
A more detailed expose of his thought came in the form of commentary in today’s FT.
Peter Ehrlich on a conspiracy theory
FT Deutschlands Brussel bureau chief Peter Ehrlich writes in his column this morning about attempts by Spain and Portugal to discredit the news coverage in his, and other German newspapers. The paper had reported consistently, citing senior European officials, that pressure is brought on Portugal to accept money under the EFSF. These reports have led to accusations that the media were conspiring with speculators to bring down the eurozone. He said that he supported the euro, but would not hesitate to publish stories – which have multiple sources – that might damage the euro, or the interests of individual governments.
Bonds and Forex
Bond spreads are moving sideways, but for interesting reasons. See above. The euro recovered moderately.
10-year sovereign spreads (against 10 year German bunds)
| Previous Day Close | Yesterday’s Close | This morning |
France | 0.374 | 0.349 | 0.333 |
Italy | 1.588 | 1.551 | 1.522 |
Spain | 2.283 | 2.264 | 2.227 |
Portugal | 3.146 | 3.231 | 3.195 |
Greece | 8.941 | 8.860 | 9.28 |
Ireland | 5.316 | 5.296 | 5.489 |
Belgium | 1.102 | 1.015 | 0.962 |
Euro bilateral exchange rates:
| € at last Briefing | This morning |
Dollar | +1.3227 | +1.3295 |
Yen | +110.93 | +111.49 |
Pound | +0.8421 | +0.8397 |
Swiss Franc | +1.3084 | +1.3078 |
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