Under irresistible financial pressure from Dr Frau Merkel, yesterday the Greek PM announced draconian austerity for his people that will leave his people facing a falling standard of living for many years to come. There is now no doubt who rules the EU, the German Chancellor. The Eurozone is now her empire. It must be preserved at all costs and her will and rules must be enforced as ruthlessly as the Romans enforced their rule 2000 years ago.
The announced package of 110bn€ with 30bn€ coming from the IMF is no more than a sticking plaster which will see Greece financially through the tourist financed summer months. Politically the summer in Greece could be very difficult with strikes riots and general civic unrest.
But where will this 80bn€ EU contribution come from? Well Germany will have to raise at least 20bn€ on the markets on its own name. Easy for the Germans who are the best credit in Europe but what about Portugal, Spain and Italy? As the EU contribution is structured as a set of inter-governmental loans, to get round the Maastricht no bail out clause, each Eurozone government will end up issuing bonds in the market. The supply of these bonds will increase and their price go down and hence the interest rate these countries must pay to raise these loans must go up. Would you want to buy other PIGS paper in these circumstances? The only place you could use them is in ECB repo ops where Trichet has announced they will take Eurozone sovereign junk bonds just to show what they think of Anglo Saxon rating agencies. We will see how that plays out in the markets.
Liam Halligan pointed out yesterday that this deal will be sold as a one off, never to be repeated event subject to dire sanctions on Greece if the do not implement the conditions attached to the loan. Its all good publicity but the markets wont believe a word of it. It reminds me of sitting through Bank of England press conferences listening to Mervyn King saying it was not the job of the BoE to bail out imprudent banks. No one in the room including Mervyn believed this. One of the core jobs of a Central Bank is just that, to bail out banks in trouble. Darling Brown and the great British public found that out 2 years ago! And have the bailed out banks changed their behaviour? Well No!
It is the job of the ECB and the Eurozone to bail out imprudent states! I think the Dr Frau is a much tougher nut than MAK but what happens when the other little PIGS come along with their begging bowls crying why should we suffer more than the Greeks? As her Third Reich predecessor Adolf found out the more fronts you have to fight on the more casualties you take.
Liam Halligan recounted in his Sunday piece a 10 year old conversation he had with Donald McDougall, then 88, but who had been Churchill's principal economic advisor during the war and a contemporary of J M Keynes. McDougall derided the Maastricht system of fines for those Eurozone nations breeching the growth and stability pact rules as 'economic nonsense'. Such fines would never be enforced which made the threat of them meaningless. So it will be with Merkel's threats. They are for German domestic consumption only.
In 1977 McDougall led an official Brussels enquiry into the fiscal implications of monetary union which concluded monetary union could never succeed without EU wide taxation and a central budget and treasury i.e. a political union like the USA. Well you could never expect our self obsessed politicians to swallow that.
The eternal truth about politicians is that they are weak willed, vain, stupid, lying creatures, who care only about getting re-elected. They corrupt and befoul our language with their weasel words even Dr Frau Merkel.