Germany Tries To Impose Its Domestic Economic Concept Of Ordnungspolitik (Governance) On The Eurozone, An Effort Likely To Fail, Wolfgang Munchau Says

In November 3, 2010 article EuroIntelligence relates that the Task Force On European Economic Governance Summit meeting of October 28, and October 29, 2010, stimulated Wolfgang Munchau to say that Germany is trying to impose its domestic economic concept of Ordnungspolitik (Governance) on the eurozone, an effort likely to fail.

Angela Merkel and Wolfgang Schauble yesterday and sought to defend their idea of a permanent crisis mechanism, (a sovereign debt default mechanism) according to the FT.

Schauble said in a speech at the Sorbonne that a bail-in of investors would lead to more efficient market-based pricing system of government debt. (We think it is interesting that the Germans still cling to the view that the market prices of government debt are, or can be, a good measure of fiscal discipline. It also show that they do not place much trust in the agree reforms of the stability pact). Schauble also said what he understood by a competitiveness agenda. The focus should not be so much on reducing current account imbalances within the eurozone, but to increase the eurozone’s overall current account balance with the rest of the world (in other words, he means the very opposite of what economists mean when they talk about redressing imbalances. For that linguistic reason alone, it is really best not to talk a competitiveness agenda, because it means different things to different people. Schauble wants more imbalances, not less).

In his FTD column, Wolfgang Munchau writes that Germany’s quest for an orderly insolvency stems from its own economic philosophy of Ordnungspolitik – an expression that has no counterparts in any other European language. But the notion, which works more or less in a domestic context, cannot be easily transplanted to the eurozone, because of the network effects in a monetary union with decentralised fiscal management. The reason why the EU was not in a position to let Greece fail was the impact on the banking sectors in the other parts of the EU – and on the ECB, which holds most of the foreign held Greek debt. This is why the eurozone does not need an Ordnungspolitik – but an Unordnungspolitik – politics of disorder.


A new two-fold crisis is at hand, that being the currency and bond vigilantes are acting together to call interest rates higher, particulary the Interest Rate on the 30 Year US Government Bond, $TYX. And the EU Leaders’ European Economic Governance Summit of October 2010 concluded with an announcement assigning Herman Van Rompuy to design a sovereign debt default mechanism.

The European Shares fell Monday November 1, 2010, on news that Herman Van Rompuy has been tasked with preparing the legalities and procedures for a nation’s sovereign debt default. European Financials, EUFN, Europe Small Cap Dividends, DGS, Spain, EWP, Italy, EWI, Austria, EWO, European stock, VGK, all turned lower; but then turned up November 2, 2010; likely popping the stock market’s and bond market’s top. It is said that a star always shines brightest before it goes out.  

Financial Times reports that European Central Bank President Jean-Claude Trichet warned that a future rescue mechanism for indebted countries, designed to shift responsibility to investors from taxpayers, could inadvertently push up their borrowing costs, citing European Union officials.

The Euro, FXE, closed up on November 2, 2010 to 139.75. The chart shows its value is in the middle of a broadening top pattern. As Street Authority relates: when you see the broadening top, the market will eventually drop.

Chart of the Euro, FXE.

The EUR/JPY, traded higher as can be seen in the chart of FXE:FXY

Irish and Portuguese credit default spreads established new records; and Ireland and Portugal’s borrowing costs hit record highs as the bond markets digested the outcome of the EU Eurozone Summit calling for a sovereign debt default mechanism.

The FT reports that borrowing costs for Ireland and Portugal hit record highs yesterday as investors assessed EU proposals to force them to take a greater share of losses in future bail-outs.  “People do seem shocked about the idea of a future eurozone debt restructuring, but this should not have been a surprise unless you really believed that the German taxpayer would always underwrite everything,” said Erik Nielsen, Goldman Sachs’ European Economist.

Ambrose Evans Pritchard relates Angela Merkel consigns Ireland, Portugal And Spain to Their Fate

In an interview with Spiegel in article The Crisis Has Deeply Shake Us Chancellor Merkel has said, “We have to find ways to harmonise the competitiveness among European countries” but added, “This should not be done by simply targeting the average or gearing ourselves to the slowest. Instead, we should always learn from the best.” Merkel also refused to say whether she had consulted her coalition partner, the FDP Foreign Minister Guido Westerwelle, before making a deal with French President Nicolas Sarkozy on treaty change in return for watering down proposed economic sanctions for debt and deficit rule breakers.

The sovereign debt default mechanism is a 180 degree turn from the sentiment expressed in May 2010 as reported by Bloomberg reporters James G. Neuger and Gregory Viscusi in EU Backs Stiffer Deficit Sanctions, Rules Out Default Mechanism and as I reported that EU Finance Ministers Announce European Economic Governance And Call For A Monetary Union With Seigniorage Authority To Issue Eurobonds.  

EuroIntelligence comments EU Leaders Trigger Another Bond Market Crisis: “We believe that the EU leaders remain complacent about the future of the eurozone, as they push their narrow national interests. We have been warning readers of a gulf between the German position on future crisis resolution in the eurozone and that of other EU member states, and that the fundamental conflicts of the first half of this year remain unresolved. The summit only agreed some minimum parameters for Herman van Rompuy’s next task force, but the difference of the positions on the crisis resolution mechanism remain extreme. Germany wants a bail-in mechanism to replace the EFSF, as a result of which European bond spreads have risen again. Investors understand that the German proposal will dramatically increase the probability of future sovereign default in the eurozone. The EFSF is not a solution to a crisis resolution, it is merely a temporary arrangement.” Yesterday, Irish 10 year-spreads move towards 5%, and Greeks spreads towards 9%, as investors ingested the implications of last week’s summit. Reuters quotes Lorenzo Bini Smaghi as saying that it was easy to talk about an orderly crisis resolution mechanism, but much more difficult to implement it, a criticism of the German approach. “In advanced economies the restructuring of the public debt would have to involve a much larger number of financial assets and liabilities, including those of the domestic banking system, vis-a-vis residents and non residents … It can be easily seen that there can hardly be anything ‘orderly’ in such a process.” …. This whole chain of events shows clearly that EU leaders continue to underestimate the complexities of a monetary union. The structure is simply not capable of handling default, while simultaneously ruling out bailout and exit. The resistance to the German plans in the European Council remains severe, and we simply cannot see Greece, Ireland, Spain, or Portugal agreeing to a crisis resolution mechanism, whose main effect would be to drive up their bond rates. It would be like turkeys voting for Christmas. Expect this to run well into next year. In fact, we would not be surprised if this debate were to continue right until the expiry of the EFSF in 2013.

Daniel Gros writes in EuroIntelligence article Liquidate Or Liquefy?: ”The obvious way out should be controlled rescheduling and/or restructuring in order to avoid turning parts of the euro periphery into ‘zombie countries’.

EuroIntellignce in article Ireland On The Brink – We Are On The Verge Of The Next Hot Phase Of The Eurozone Crisis relates: Another important factor in the re-rating of Ireland’s debt has been the warning by LCH.Clearnet, one of the bond market clearing houses, that its members might face an increase the deposits for trading in Irish debt securities, according to the FT. That essentially means that are significant doubts about Ireland’s liquidity. Further Russia’s sovereign wealth yesterday put Ireland and Spain on a list of blackballed countries. a time series from the Atlanta Fed, via Calculated Risk, showing just how bad the bond spreads have become (they have gone parabolically higher). 

EuroIntelligence relates Samuel Brittan on why the euro will break up.  In his FT column, Samuel Brittan writes that the attempts to save the euro sound eerily familiar to someone who has observed the various sterling crises of the 1960s – as he has. He said the pattern is always the same – international rescue operations, backed up by domestic austerity packages. Things seem to normalise for a while, but then “when few are looking, there is another crisis, another set of international rescues and another set of domestic restrictions. And so on. Eventually the struggle is abandoned, and political and financial leaders work to pick up the pieces.” He says the only question is whether the euro will revert to national currencies, or whether it will break up into two or three currency zones.”

EuroIntelligence concludes: “Most of our readers will see this as typical British anti-European viewpoint. But that is not true of Samuel. He is profoundly pro-European. What he says is merely consistent with everything we know from economic history, a discipline the euro policy crowd is unfortunately not much aware of. Witnessing one inept policy response after another, we are beginning to converge to his view.”

Brent Radcliffe in Yahoo, Ivestopia writes: “Defaulting on sovereign debt can be more complicated than defaults on corporate debt because domestic assets cannot be seized to pay back funds. Rather, the terms of the debt will renegotiated, often leaving the lender in an unfavorable situation, if not an entire loss. The impact of the default can thus be significantly more far-reaching, both in terms of its impact on international markets and of its effect on the country’s population. A government in default can easily become a government in chaos, which can be disastrous for other types of investment in the issuing country.”

On February 25, 2010, the Euro, FXE, stood at 111.35 and six trading days on March 5, 2010 later it plunged to 109.75. It was at this time that Drago Tzvetkov of the Atlantic Council wrote on the Threat of Sovereign Debt Default relating:  The Atlantic Council’s Global Business and Economics Program hosted a conference call with Professor Leszek Balcerowicz on the Euro debt crisis.  Balcerowicz, a former Finance Minister of Poland, shared his views on the measures needed to ensure Eurozone unity and assessed the current difficulties facing European nations as they attempt to rein in public spending and decrease their deficits.

The financial crisis has entered a new phase.  What began as a series of mortgage defaults soon became a crisis of bank insolvency.  The dire state of Greece’s budget and debt points to a more chilling aspect of the crisis: insolvency of sovereign nations.  EU leaders have yet to outline a concrete plan.  With fourth quarter GDP numbers in the Euro-zone looking dismal, unemployment high, and economic growth low, selling a “bail-out” plan will be politically unpopular. Dr. Leszek Balcerowicz analyzed three options for Greece and Europe to mitigate damage to Europe’s economy, and the Euro itself:

  1. Fiscal adjustment to prevent default: Greece needs to make “radical and deep” adjustments, including fiscal changes to cut excessive spending.  This should be coupled with aid from the IMF, which should provide conditional crisis lending.
  2. A bail-out by EU governments: While acknowledging that this is not a long-term solution and that it is “not politically feasible” given German public opinion, Balcerowicz put the bailout option on the table.  The negative risk of the resulting public resentment would sow further distrust of the Euro project.
  3. The departure of Greece from the Eurozone: Monetary independence would allow Greek authorities to depreciate the currency but ignore the fundamental causes of its budget distress, and add skyrocketing Euro-based debt to Greece’s woes. With no constitutional or legal mechanisms for leaving the Eurozone, the Greek public would not be willing to enter “politically unchartered waters.”

Recommending fiscal discipline as the only viable option, the former Polish Finance Minister and architect of the “shock therapy” that led the Polish economy communism to the global marketplace said, “Shocks from time to time are great educators.  I don’t know of any country which would have suffered because of excessive fiscal discipline.”  He emphasized that Greece should face the consequence of its actions and be expected to implement the necessary reforms.

So on November 2, 2010, on the Eve of QE II,  Ambrose Evans Pritchard writes of The Fed’s Impending Blunder … Jeremy Warner writes, The US Federal Reserve’s Latest Bubble Threatens Mayhem, the prospect of more quantitative easing, QE, will be driving government bond yields to levels that price in a depression …

Tyler Durden writes, Paul Farrell On The One Thing Buffett, Gross, Grantham, Faber, And Stiglitz All Agree On: “Bernanke Plan A Disaster” …

EconomicPolicy Journal reports A “Conservative” D.C. Think Tank Calls for More Money Printing from Bernanke: The American Enterprise Institute in its Economic Outlook calls for more money printing by the Fed.

The two-fold crisis, of monetization of US Sovereign Debt by the US Federal Reserve, and the EU Leaders’ European Economic Governance Summit of October 2010 call for a sovereign debt default mechanism, is going to give license to the currency traders to start competitive currency deflation, that is competitive currency devaluation.

And Ireland will be a developing focus for the vigilantes, as Dara Doyle of Bloomberg reports Ireland May Have One Month to Stave Off Bailout: Credit-default swaps linked to Irish debt rose 28 basis points to 526, according to CMA prices. The cost of insuring Greek debt for five years was 850 basis points, the most expensive in Europe. German proposals to put in place a permanent debt-crisis mechanism at EU level are also adding to Ireland’s problems, says Harvinder Sian, a London-based analyst at Royal Bank of Scotland Group Plc. While German Chancellor Angela Merkel reiterated today that she wants to force bondholders to foot some of the bill of any future bailout of a euro member, some officials argue that could spook investors at a time when countries such as Ireland and Portugal are trying to cut deficits. “Up to last week, I would have said that Ireland could avoid a bailout by taking the measures needed to reduce the deficit,” said Sian. “Now, the measures being proposed by Angela Merkel are casting a shadow, not just on Ireland, but across the periphery.”

Writing in the FT, Samuel Brittan argues, “Euro-federalists will fight tooth and nail to prevent a disintegration of the eurozone. They are powerfully reinforced by banks with investments in the peripheral countries. But if something is unsustainable it will not be sustained. Currencies have left monetary unions in the past, a recent example being Ireland’s departure from the UK monetary union in 1979.”

On November 2, 2010, the world has achieved peak fiat wealth. And the world has achieved peak investment liquidity. Lacking liquidity, junk bonds, JNK, distressed securities, FAGIX, and LBO debt, PSP, will now rapidly fall lower in value.

We are passing through Peak Credit and from the free-flowing investment liquidity, that came with Alan Greenspan, the czar of credit liquidity, opening credit wide for businesses, home debtors, HELOC loans with their mortgage equity withdrawals, and individuals; and Milton Friedman, instituting the floating currency regime, where the Bank of Japan, through its ZIRP 0.25% yen carry trade financing, and the US Federal Reserve QE 1 and QE2 ZIRP, have flooded the world with debt. The world is inundated with debt it cannot pay.

But, beginning now, the currency traders will institute debt deflation.

Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

Ever-failing sovereign debt and falling currencies will mean ever-increasing austerity.

The corporate debt, PICB, and world sovereign debt, BWX, that the currency traders cannot destroy through falling currency value, must be and will be applied to every man, woman and child on planet earth.

I believe that eventually a Global Seignior, that is a top dog banker who takes a cut, will institute unified regulation of banking globally, as referred to, in the James Politi and Gillian Tett Financial Times article, NY Fed Chief In Push For Global Bank Framework, and that the Seignior will oversee all matters of debt and credit worldwide. The Global Seignior, will likely have a  unifying vision for humanity and will implement a global currency system, to conduct economic transactions, as many nations will have lost their sovereign debt seigniorage. All seigniorage will come and go through him.

And I believe that he will be complemented by a Global Sovereign, someone with strong rule, like that of Angela Merkel, who will oversee global governance, as it is established in the ten global regions, as called for by the Club of Rome in 1974.

The Sovereign and The Seignior will likely rise to power through globalization and global corporatism, that is an ever-uniting of government and business. Between the two, they will own the world and its people, lock, stock and barrel.

Strong Reactions Erupt Over The Merkel’s Ordnungspolitik (Governance) Of The Eurozone

Open Europe Press Summary of November 3, 2010 relates that strong reactions have erupted over the Task Force On European Economic Governance Summit meeting of October 28, and October 29, 2010

1) “Merkel’s treaty revisions will ensure that EU fiscal federalism will have irreversible legal force”,  Kaletsky says.
The FT reports that German Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have launched a defence of Germany’s demands for a system for the ‘orderly rescheduling’ of sovereign debt in the eurozone, following criticism from ECB President Jean-Claude Trichet. “Nothing at all in the current rescue measures for the whole euro area and for Greece will be changed,” Merkel said yesterday. “What we are doing is talking about the future.”

The Irish Times quotes Schäuble saying that he is wary of Germany taking too great a leadership role in the EU. “I have a sceptical view of a kind of general German leadership because the term ‘hegemony’ has bad associations in the light of our history,” he wrote in FAZ yesterday.

In the Times, Anatole Kaletsky, notes the wider proposals to establish EU economic government, which will include closer monitoring of national budgets and economic policy, and sanctions for rule-breaking eurozone countries, “will shift key policies on tax and spending beyond national control”.  … He argues, “That one of the most controversial decisions in modern European history has been taken with almost no public awareness or debate is a tribute to the top-down style of government perfected by the EU’s political elites.” …  Adding that, “Ms Merkel’s treaty revisions will ensure that EU fiscal federalism will have irreversible legal force.”
WSJ FT Times: Kaletsky Irish Times Reuters Deutschland FAZ

2) French news site Contrepoints features Open Europe’s blog post looking at the EU summit.

3) EU treaty change sparks calls for referendum in the Netherlands
EUobserver reports that Geert Wilders’ PVV party is considering calling for a referendum in the Netherlands on the EU treaty changes proposed last week. The party, which the governing coalition relies on for support, has been joined by the Socialist Party, which has already called for a referendum.

Socialist MP Harry Van Bommel is quoted saying that now “It all depends on the Labour party. If the Labour Party backs us, then we have a parliamentary majority.”

On his EUobserver blog, Telegraph Europe Correspondent Bruno Waterfield notes that at last week’s EU summit, EU leaders were “absolutely agreed on one thing: there must be no referendums”. He quotes European Commission President, José Manuel Barroso, saying: “It is worth looking back at the negative referenda which derailed the ratification process of the European Constitution. This told us something. It told us that European citizens were worried, about their jobs, their pensions, their education, their quality of life and their environment. And they looked to the EU for answers”.
EUobserver Elsevier Europa press release EUobserver blog: Bruno Waterfield

Keywords: strongreaction, strongreactions


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