Is the Bundesbank spoiling for a fight over the destiny of EMU? Free-Market Analysis: Bundesbank chief Axel Weber has pushed his attack on EMU's policy elites one step further. This time he has undercut the triumvirate – ECB chief Jean-Claude Trichet, Eurogroup chief Jean-Claude Junker, and Commission chief Jose Barroso – with an op-ed for the Financial Times excoriating their plans to head off another round of the debt crisis by giving real teeth to the eurozone's €440bn bail-out fund. He claimed that the latest EFSF proposals – which investors had already pocketed as a done deal – would amount to "eurobonds more or less through the back door." – UK Telegraph
Dominant Social Theme: Germany will make a fuss and then go along.
Free-Market Analysis: We've written recently about Ambrose Evans-Pritchard's change of heart regarding Spain, an important change given that he is perhaps the most prominent Euroskeptic writing for a major news daily in Britain or Europe. A week ago, Evans-Pritchard decided that Spain was going to be able to service its debt after all, given a combination of competitive high-tech factories, a well-educated labor force and a high-savings rate. The EU was not going to take a tumble after all, or not right away. This he indicated came as a surprise to him. If there were going to be an EU unraveling, he decided, it would come from Portugal, Greece or perhaps Germany. You can see our commentary on that here:
Now, in this article (see excerpt above), like a homing pigeon, Evans-Pritchard returns to his previous position as a Euroskeptic. We've never sure if Evans-Pritchard entirely believes his presentations or if he is at least partially playing a devil's advocate. He's no Austrian, believing in doing away with central banking, though he does evince from time to time a hankering for a gold standard. But mostly, when it comes to solutions, Evans-Pritchard seems to want monetary inflation; at least he has spent several years suggesting it and warning that the ECB's tightfistedness is exacerbating the financial crisis.
The reason we enjoy commenting on Pritchard's article is because for a mainstream journo he is refreshingly candid about the EU's failings. And despite his strange affection for Keynesian-style monetary stimuli, he is well-informed about the ins and outs of fiat money and breaks many stories about EU monetary policy. In this regard he certainly does not hew the line of the Anglo-American elite that developed the EU and the euro; the elite's dominant social theme is a simple one … "We shall overcome." (Charlemagne's empire rises once more.) On the other hand, as we regularly point out, the elite's fear-based promotions function via Hegelian dialectic. Evans-Pritchard certainly provides a position that others do not.
In this article, above, he is returning to familiar themes, and providing some additional clarity as well. It does seem that there is a genuine split between Axel Weber and Angela Merkel. Not only that, but this split is mirrored in German society as well. By coming out so publicly against current German policies regarding the EU, Evans-Pritchard suggests that Weber is "sending a message" to the eight judges of the German Verfassungsgericht who will rule on whether the recently agreed-to EU bailout is constitutional.
The understandings with which Germany entered the EU's initial common market seem on the surface to forbid Germany from underwriting the profligacy of other nation states. Or so the argument goes. Here's what we wrote on the subject a week ago: "Nonetheless, the lawsuit is not liable to have much traction. The court is a powerful one within the German system, but the position of the courts has generally been pro-integration."
We thank the Irish Times (which goes on at length) for that bit of analysis. But Evans-Pritchard, back in his euro-skeptic mode, seems to give Weber's position a good deal more credence: " He may have scuppered any chance of a deal to boost the fund at next month's EU summit. The markets are not going to like that … Specifically, he slammed proposals to cut the penal rate of interest rate charged on the rescue for Greece, Ireland, and any other supplicants. He called it a ‘danger', no less."
Evans-Pritchard goes on to explain Weber's larger stance, his reluctance to have the EU purchase the PIGS dodgy bonds; likewise, he criticized the idea of having the EU print money and lend it to the PIGS so that they could then buy their own discounted debt. Both of these schemes and others were bound to be dangerous as "the risks of the remaining private bondholders would increase sharply, thereby significantly heightening the pressure to sell."
Evans-Pritchard believes Germany is backed into a corner. If its leaders go along with Europe, Germany will essentially have become the EU's guarantor, a fate that its population has increasingly dreaded would come to pass. If Germany's court system and its cadre of anti-EU leaders remain committed to a strong (German) currency, it is the EU itself that will suffer, maybe terminally.
He doesn't mince words, pointing out that Germany must now make a decision as to the solvency of the EU. "It has to choose between a Transferunion and letting EMU die. By Transferunion, I mean full fiscal union: handing power to set taxes, draw up budgets, etc, to an EU government, which can outvote Germany, just as Dr. Weber been outvoted by the majority on the ECB council. This means the end of Germany as a self-governing sovereign nation … Needless to say, the political class as a whole has never faced up to implications of EMU. Events are now forcing them to face up."
This is of course where Evans-Pritchard goes off the rails once again in our view. He states that the Germans have been caught by surprise and that they never fully understood the ramifications of the EU. And yet, at various times in the past two years, the socialist leaders of the EU have all but stated that an anticipated crisis was supposed to drive the union from an economic one into a political one. Are we to believe that the French and Italians understood but the Germans didn't?
The reality is that after two years of dithering, the economic crisis affecting the EU is probably going to come to a head. Either the EU will move forward to a more powerful union or it won't. There will be substantive chaos if it does not. And in our view there will be singular difficulties if it does. All that we have been discussing was supposed to have been the purview of the EU's top minds; and not fodder for journalism. But now these machinations are well known and we wonder, if a closer union comes to pass, whether the South, already stressed by "austerity" will put up with it.