Otto von Bismarck made a speech in 1862 saying, "The great questions of the time will not be resolved by speeches and majority decisions... but by iron and blood", and thereafter was known as The Iron Chancellor, an appellation all subsequent Kanzlers aspired to, some far too much so. of course. There is more than a whiff of iron in the air of the sovereign debt crisis, Governments' own Credit Crunch, iron being also the smell of blood. Angela Merkel and her Finanzeminister Herr Wolfie Schäuble have not appeared tolerant of Diskussionen, preferring summit policy agreement only by Edict of Maastricht, the Euro Growth & Stability Pact. Since January there have been oft-repeated calls among politicians, public, market traders and newspapers for Greece (its commercial and treasury paper now junk status) to leave the Euro, then later calls for Germany to leave, and most recently France saying it might leave if Germany does not change its economic stance (these two countries being the only ones with triple AAA status left in the Euro Area!) Netherlands should have triple-A status except it allowed its biggest banks to collapse in ignominy (I hope Nout Wellinck becomes the next President of the ECB at the end of next year to replace Trichet?)
The UK stands hunched offshore, on the sidelines, hand-wringing, and navel-gazing only at its own public finances. Ireland, Spain,and Portugal are teeth-chattering to see who or what hits them next, Italy somewhat secure by comparison, a novel experience for Rome, and France feeling it must be the unity champion, but not if Germany fails to hold up its half of the EU project deal.
This story below is a reduced form of the debate, a triangle with Angela Merkel (whom the Daily Telegraph called "brass-necked") representing the EU's biggest economy that stands as creditor counterpart to most of the rest, Jean-Claude Trichet the Euro Area's financier ECB, and George Soros representing international capital markets.
Trichet has decided he must side with Germany that some might conclude is ECB's biggest paymaster, but also its biggest customer-borrower. Germany has net foreign assets of €1tn, while the rest of the Euro Area's is minus €2.5tn, and germany owna 40% of ECB's reserves. It's ex-Euro Area trade surplus also halves the rest of the EA's deficit. These apart from any other reasons are good ones for why ECB President Trichet should remain on Kanzler Merkel's good side.
Trichet said after the G20 last week that "Merkel’s actions will boost confidence among households, investors and companies and will help consolidate the recovery", speaking to Italy's La Repubblica. That view is at odds with what many economists and veteren arbitrageur George Soros said on Wednesday, telling a Berlin audience why the euro is flawed: "By insisting on pro-cyclical policies, Germany is endangering the European Union... "I realize that this is a grave accusation, but I am afraid it is justified." 
Trichet dismissed this, saying the euro [EUR/$=1.2182] is a very credible currency that kept its value and guaranteed price stability for 11'5 years, with average annual inflation of 1.98% in the euro-zone. "A currency that guarantees such stable prices, it's of value in the eyes of domestic and international investors" Trichet told La Repubblica.
Of course, as every investor knows, supposedly past performance is no guarantee guide to future performance. Yes, but? The day before, Wednesday, Soros said that "by cutting its budget deficit and resisting a rise in wages to compensate for the decline in the purchasing power of the euro, Germany is actually making it more difficult for the other countries to regain competitiveness."
That is correct if Germany's €250bn foreign trade surplus is 60% earned within the EA, which I think the data allows us only to suppose to be probably true.
If so it's $120bn ex-EA surplus helps pay via the ECB for most of the rest of the EA's non-€ trade deficit with the rest of the world but for which it gets €150bn trade & payments gain from the rest of the EA, a nice trade. Netherlands also earns a substantial trade surplus, as do a few others, much of it from Germany as in Ireland's case. But, it is from the above interesting that we could put a figure of €50bn on how much more Germany should be importing annually net from the rest of the EA, which I suggest works out at a rise in gross imports from the rest of the EA of €200bn roughly to get a change in the net surplus of €50bn.
That means Germany increasing its imports by over 16%, and from the reast of the EA by 27% or three months worth. That is a big adjustment and practically impossible; looks easier and cheaper just to pay over €50bn annually, but how? The Europen Stabilisation Bank fund of €720bn of which €250bn is from the IMF (using EA member states deposits and drawing rights perhaps) equates to a decade of such payments if the balance all came evenNtually from Germany. Its contrubution is just shy of €150bn.
Merkel defended her actions last weekend, saying they will prevend future crises. Well, er, no, that's what they said about TARP in the USA. All experts are saying that Europe's banks have not disclosed their full losses from the Credit Crunch and Recession. Indeed, looking at some banks such as certain french banks, others too, one would be hard pressed to find signs of either Credit crunch or recession in the balance sheets such as BNPP, with certain notable exceptions as SocGen and of course the small local banks. But, experts can be wrong. Anglo-saxon experts would be wrong if they expect to find continental European banks except for Spain and Greece to be so heavily exposed to property as US-UK banks. The Netherlands banks bought in foreign property exposure e.g. Fortis, and ABN AMRO, ING too but less so, to their cost.
Ireland, remarkably for a small country with a surprisingly huge trade surplus, its banks ran with the credit-boomers, didn't lend to business much, lavished all on property lending and incurred a massive balance of payments deficit double-negating its trade surplus - truly bizarre! The UK banks lent far too heavily on property and mortgages but unlike Spain, and Ireland there is no poperty surplus so residential values fell less than expected, while only commercial property did the expected and tanked. hence, the collateral damage of Credit Crunch and recession is a curate's egg in Europe. let's not forget that Germany is another China in trade volume, surplus and massive over-lending to business while relatively neglecting property and household consumer lending.
In any case the Credit Crunch did not result in a Euro Area recession so much as a big short-lived negative growth shock from the USA-UK bow-wave. The Euro Area boat (Das Boot) has its normal recession still due, if it arrives on time, before this time next year! The socvereign debt crisis may take the blame including Germany's Iron Kanzlership, and people will talk of "double-dip" and UK will catch a feverish cold from it, a dunking from a Euro bow-wave, but actually this would be a misinterpretation. Continental Europe regularly has its recession 24-30 months out of synch with the Anglo-Saxon cycle. Hence, there is something tobe said for battening down the hatches on government finances to make some room for expansionery spending when recession hits.
Could Euro recession be avoided like the UK avoided recession in 2001 by pre-emptive spublic spending increases. The answer is possibly yes, but more probably no, because the Euro Area is too evenly split between credit-boom and export-led economies. Will another or prolonged crisis sound the death-knell for the Euro system, and also be triggered by assuming greater writedown losses to please the Anglo-Saxons, haha? The writedowns from Credit Crunch currently stand as follows:
Whatever the triffers appear to be, the Euro System is in a "Merkel of all Crises" (Scots: muckle; US usage 'Mother') such that the Euro system's collapse is more probable than diplomats assume to be thinkable. The currency union may not break-up or the Euro actually crash to the floor, but the system must change. And, do not under-estimate the power of financial speculators to smell blood in the water and what they will do to garner the tens of $billions of speculative profits on fears of Euro-collapse, even if the Euro never truly falls apart! Pitted against that is the political will of the EU, which should prove stronger, not least to avoid political security crises within and along EU borders.This is more than just deflation Risks. But Trichet does not believe that austerity measures being by European governments will cause deflation. can he back that up with systematic evidence - no! he hasn't got a macroeconomic model to tell him what to say on that score. his job is spin-doctoring for confidence raising.
Some bearish investors are betting that cuts in government spending across the European Union will add to deflationary pressures at a time when consumers and businesses are de-leveraging, lending and borrowing less, battening down until the storm passes.
Growth will fall sharply, with zero growth effect coming from household consumption, business investment or bank lending when government too is deflationery. Where is growth to come from? Will it be trade with the rest of the world or asset sales to foreignors? hardly. Whatever is imagined cannot be currently foreseen or computed by the financial markets experts, words I offer up with a dry taste and pained smile. Some speculators seem more like agent-provocateur rioters or muggers to me.
Private sector deflation is pushing yields on 10-year bonds down to 2 percent, triggering a new wave of quantitative easing, Bob Janjuah, chief markets strategist at RBS told CNBC. Is that telling us something? Not in my book. Markets are not economists and they read their capital market screens like Chinese courtesans read tea-leaves. "I don't think that such risks could materialisee," said the great seer Trichet, adding that inflation expectations are well anchored. They would be if deflation's coming? "As regards the economy, the idea that austerity measures could trigger stagnation is incorrect." one has to ask, why not? How can stagnation be triggered except by austerity on all fronts beginning with government? trichet has an answer to that chiming with merkel but totally opposite to Soros. This is not a love triangle at all! Reforming the real economy in each country in the euro zone is what is needed, according to Trichet.
That is just so easy to say and as anyone knows it is a long term gameplan, but not one that governments sho believe in leaving matters to free enterprise and financial markets engage in trying to achieve beyond a relatively passive (supply side fiscal economics) second guessing.
"We ask all governments to be determined to carry out structural reforms to increase the potential growth," trichete said. "I insist on the need to boost work productivity: in the medium- and long-term, growth depends right on this." If PIIGS could fly!
It is bizarre that Trichet can say Governments have to restructure, or economies do so, when we know it is already proving exceptionally hard to restructure the banks, something the ECB needs to take more responsibility for and relieve EA member states of the bruden on their budget balance sheets. None of this economic competitiveness restructuring can happen unless Europe's banks in all countries dramatically change the composition of their lending between productive and non-productive investment, from demand to output and vice versa. Export-led economies' banks are far too heavily exposed to industry assets and credit-boom economies' banks even more exposed to property assets. If the EU and EA simply rely on radically restructuring without coordination and financial rebalancing measures how the chips will fall may turn into a game of chance.
The Commission's meisterwerk of a €720bn stabilisation fund appears to be a keystone, but it has to cope with Europe's banks refinancing €5 trillion in funding gap finance ove the medium term that could very easily take all of that and more.There is more darkness to come before the dawning dawn.
