Greece is going bust. The euro is sliding. The bond markets are in open revolt. And what does the German government decide to do? Shoot the messenger.
The German government rocked the markets last week with a swift, unilateral ban on short-selling and speculation in European government bonds. It caught everyone by surprise.
Chancellor Angela Merkel followed that up with calls for a new tax on financial transactions, and a European credit-rating company to replace the existing US giants.
The euro crisis is looking more like a German crisis every day. The way the single currency now works is clear: It involves massive transfers of wealth from the richer to the poorer regions. And it means you have a soft, political currency. If Germany doesn’t like that, it should decide it doesn’t want to be part of the euro club anymore.
It’s pointless to shoot the referee and complain you don’t like the rules of the game. If Europe’s most powerful government can’t come up with a better response, it isn’t surprising that investors are so nervous about the euro’s future.
Politicians have a poor record of reading financial markets. But even by those dismal standards, Merkel made a hash of her attempt to clamp down on speculation in euro- area government debt. Short-selling will be banned, but only in Germany, since that is the only country Merkel governs. Yet, since Frankfurt isn’t a very important financial centre anymore, it isn’t likely to make much difference.
It isn’t true that speculators caused this crisis. Traders may have brought the crisis to a head sooner, forcing governments to respond faster than they would have liked, but it doesn’t make any difference to the crisis itself. All it changes is the timescale.
Surely it is better to confront the issues now, rather than postpone them. That is all that a ban on short-selling would achieve.
Likewise, a tax on financial transactions simply misses the point. There is a case to be made for a new levy. Perhaps the financial industry has grown too big compared with the rest of the economy. Maybe there is too much short-term trading. But that is hardly the problem in Greece. The markets were just pointing out that the country had borrowed too much money, and had no clear plan for paying it back.
No one disagrees with that analysis. Investors would still be shorting Greek bonds even if they had to pay a 1% levy every time they did so. Why? Because they are rubbish. Rubbish plus 1% is still rubbish. Hedge funds are still going to short Greece because it’s going down the tubes.
As for a European ratings company, it is hard to see what that could achieve.
The likes of Moody’s Investors Service and Fitch Ratings already do that job. Some people say they do it well, others badly. Their independence has been questioned in the last two years and rightly so. But they have built up a measure of credibility over the years.
A new European credit assessor—let’s call it Sweep All the Dodgy Euro Debts Under the Carpet Rating AG—would have as much credibility as an Icelandic broker peddling a Dubai bond. Its whole purpose would be to fiddle the figures so they didn’t look so bad. What would be the point?
What Merkel’s attack on the markets reveals is something very German: angst. Germany has discovered a lot about the euro in the past six months. It won’t be a hard currency. Nor will it always work in Germany’s interests.
In reality, the Germans will have to accept that membership of the euro means the rich regions have to constantly bail out the poorer ones. And the European Central Bank will sometimes have to compromise monetary policy to allow the weaker members to stay afloat.
Those are the new rules of the game. Germany has only two choices: It can adapt to the way the euro now works and start paying the bills. Or it can quit the single currency.
Britain was wise to remain a member of the EU without signing up to the euro. There is no reason for Germany to stay inside if it doesn’t like the way it is working out.
The markets have looked to Merkel for leadership. They expected her to confront harsh truths and make big decisions. Instead she decided to let off steam and shoot the messenger.
If that’s the best the euro-area governments can do, it isn’t surprising investors are heading for the lifeboats.
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