I’ve got the sense, from looking at how Germany has reacted to the crumbling Eurozone around them, that they were predisposed to not react until it got personal, until the depressed economy started affecting their own people. Germany made great economic strides by using the Eurozone to their benefit over the last 10 years, and for a solution that would accommodate all of Europe, that would have to recede.
Well, it’s receding. Yesterday, German manufacturing numbers fell. Today, their business confidence index dropped to a two-year low. The weaknesses in the Eurozone economy are finally starting to reflect themselves in Germany. That’s when you’re going to see action.
In fact, you already are. The German-dominated European Central Bank changed their collateral availability, as I see it to basically allow anything to be called “collateral”. This is a boon to banks and has spurred markets forward. It’ll probably last a couple hours, but it’s a sign of a looser policy on at least some fronts.
The political problem for German Chancellor Angela Merkel is that she now has a veritable Army of Europeans uniting in opposition to her. New French President Francois Hollande has led the coalition, and Spain and Italy have joined them – notice Italian Prime Minister Mario Monti’s comments that there’s “a week” to save the Eurozone. And now, the IMF has come out on the side of the doves as well:
The International Monetary Fund on Thursday challenged Berlin’s game plan for pulling the eurozone out of its crisis by advocating a series of short-term fixes that the German government has resisted.
Christine Lagarde, the IMF chief, said eurozone leaders needed to prevent the single currency from deteriorating further by considering the resumption of bond buying by the European Central Bank and pumping bailout money directly into teetering banks.
While Germany has resisted such measures, Ms Lagarde said the IMF was concerned about “additional tension and acute stress” in both the European banking sector and peripheral governments. She warned that the long-term measures being considered by EU leaders ahead of a summit next week were not enough.
Obviously more free money for the banks is not my idea of a solution. But it’s more the trajectory of practically every leader in the Eurozone lining up against Merkel that interests me. As mentioned above, there’s an EU summit next week, and Merkel, Hollande, Monti and Spanish PM Mariano Rajoy are expected to meet. Monti’s basically right – without a solution from the summit, bond investors will pick off Eurozone countries one by one, increasing their borrowing costs to unsustainable levels. Everything in Europe is consequential at this point, but next week’s summit perhaps more than most. And Germany, cornered by the other powers, may see no choice but to act.