Merkel and Sarkozy impotent in the face of debt crisis

Alasdair Macleod – 20 August 2011

Mrs Merkel and Mr Sarkozy achieved nothing last Tuesday by holding, at short notice, a meeting to sort out the eurozone sovereign debt crisis. They only succeeded in exposing their political impotence. They came up with four proposals – none of which stand a chance of being implemented – having dropped one of Sarkozy’s, the issuance of a “eurobond”, after the Germans refused to lend their name and credit to it. This charade has more to do with French presidential elections next year than anything else, and Sarkozy’s diminishing re-election prospects. Mrs Merkel must regret being dragged into it.

They have no answers for the sovereign debt crisis, which now extends beyond the PIIGS to Belgium and France as well. According to the CIA database, the only eurozone countries with budget surpluses last year were Finland and Malta; the rest have a combined budget deficit of $760bn. Germany, who everyone is relying on, accounted for $120bn of the total deficit and has a government debt-to-GDP ratio of 80%. The most solvent are Estonia, Luxembourg, Slovenia and Slovakia, three of which have not had the chance to rack up much debt having been shackled behind the Iron Curtain for much of the last century.

The reality is that the member states of the eurozone face a political crisis. The politicians refuse to address their insolvencies and slash government spending. The alternative is for the European Central Bank to start printing money to cover budget deficits, which thus far it is refusing to do. The ECB does not want the political crisis to become a euro crisis. It is one thing to anticipate a crisis by announcing such a measure, another to respond to it. Having nailed its colours to the sound-money mast (relatively speaking), the ECB can hardly change course now, even if its constitution allowed it. The politicians will have to find their own solution.

The whole European Project is now at a dead-end, and there is a loss of political momentum. It was this momentum and the vision of the European leaders that kept the project going, because the little desire there was for it from their electorates is now evaporating. The original reason for the EU’s existence, to secure peace and trade between the European nations, is no longer relevant. The political establishment is now highly vulnerable to attack from dissenters and many of them know it.

It is the nature of politics that when a political ideal loses credibility and when it lacks fundamental democratic support, it crashes. The irony is that the only bedrock under these shifting sands is the euro itself. Very few commentators seem able to grasp this, regarding the euro as symbolic of the eurozone mess and therefore most vulnerable. But as the political situation deteriorates, the ECB will have less monetary room for manoeuver, because it will be seen as the last outpost of stability. For this reason the euro is likely to strengthen further despite the continent’s sovereign debt problems.

Angela Merkel faces great difficulties with domestic politics. In order to survive, she is already wisely turning her back on the European Project. In contrast, Sarkozy has tied himself irrevocably to France’s place in the grand European ideal. We await his electorate’s verdict next year.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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