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The right balance

· The Franco-German agreement and the unknowns of the crisis ·

The plan which Germany and France intend to present to the European Council on December 9th is not only the umpteenth move to contain the crisis. The agreement announced on Monday by Merkel and Sarkozy reveals in chiaroscuro the profound difficulties that the European project is experiencing and confirms that a turning point has been reached.

Sanctions: the key word has been echoing for weeks, but European leaders had never managed to reach a common agreement. The French-German plan now puts down precise stakes: there will be automatic sanctions for countries that do not respect the 3% debt limit. The point is – based on Merkel and Sarkozy’s comments – that decisions will no longer be made unanimously (as currently happens) but by a qualified majority. In addition, the Court of Justice will supervise the conformity of various budgets to the Treaty. Many analysts agree that this means two things: an additional restriction on the sovereignty of national governments and the concrete risk of a division of Europe, where alliances will count even more and weaker countries will risk not having a voice in the matter.

There remains the knot of the European Central Bank (ECB). In a recent speech at the Bundestag, Chancellor Merkel looked to Frankfurt to underscore the idea that the institution headed by Draghi has the role of, “assuring financial stability,” and not only of controlling inflation. Is this an invitation to a greater role for the Central Bank? No one can say with certainty. In the same speech, Merkel explained that the ECB is not the American Federal Reserve and therefore does not have the same power as a last-resort lender. Certainly, the comments about the independence of the institution lead one to think that something is moving between Berlin and Paris. But it is not for certain: for the moment, France and Germany remain silent on Frankfurt, and it is no coincidence.

In reality, neither France nor Germany can dictate the law since they both are also facing their own large difficulties. It seems inevitable that Standard & Poors will cut France’s triple-A rating. According to the OCED, Paris has entered into a phase of the crisis, although “brief and to a slight degree,” with a GDP which has increased 1.6% compared to the 1.75% predicted by the government and with state bonds under pressure. Things are not looking good either for the Bund: less than one week ago, the auction of 6 billion failed (placing 3.6 billion of a total of six) forcing the Bundesbank to intervene. The OECD estimates growth of 3% in 2011 against 3.4% in May and .2% in 2012 against an initial 2.5%.

From the ashes of Lehman Brothers, two little-noticed emergencies are coming to the fore. The first is called liquidity. Banks have always had difficulty collecting funds in dollars. The market is stagnant because of uncertainty: no one (other banks, pension funds etc.) trusts each other any more because no one can provide solid guarantees. The second problem has to do with growth: in the long-term, austerity measures could affect small to medium size businesses. It is already happening: in Germany, the index of the Markit institute which monitors manufacturing, has signaled a decline to 47.9% in November from 49.1% in October. Only the ECB, according to experts, can help re-open the flow of credit. This is why the meeting of the Governing Council on Thursday, December 8th is much awaited. Many assume that there will be new cuts in interest rates to 1%, but there are also other possibilities – rumors of which are circulating in the financial world – such as changing the mechanism of auctions and lowering taxes on bank deposits.

Will it be enough? The fear is that political indecision and the lack of a joint strategy will increase these two emergencies, creating a boomerang effect which would be devastating for development. It would be the end of the euro and maybe even the dollar. But finding the right balance between austerity and growth is possible. At this stage, maybe only a new global pact between politics and finance – what many have called a new Bretton Woods – could avoid the worst.




St. Peter’s Square

Dec. 15, 2019