Whilst I have spent the last couple of days looking at the state of the UK economy and examining some new economic statistics there have been some developments concerning Greece. Firstly there has been no detail at all announced on the (non) plan that Jean-Claude Juncker was proclaiming on Monday. However the German stance has shifted with Chancellor Merkel publically airing the possibility that the International Monetary Fund (IMF) could be involved in a rescue for Greece. This has two main consequences one is that Europe’s politicians have been doing contortions to say that Greece does not need a rescue, but talking about the IMF bursts that bubble on the grounds that why would one even mention the IMF otherwise? The second is this such a move would involve a loss of credibility for the Euro project in world markets as well as being something which Europe’s politicians who are mostly very much in favour of the European Federal project ( if nothing else it provides plenty of tax-free jobs for politicians) would rather avoid. There would also be an implicit downgrade in the status of the European Central Bank. Also if you remember this is a return to the beginning of this crisis as a rescue by the IMF was suggested then. My theme of political incompetence and grandstanding just goes from strength to strength.
All through this crisis Germany’s politicians have been hamstrung by a vote in the German Constitutional Court from 1993 which restricts her ability to be involved in a bail out of another Euro zone state. Whilst this Court may not be popular with them I would imagine that Germany’s electors and taxpayers are rather grateful for it. This has been what has stopped a Euro zone bail out as whilst a dose of Euro fudge would probably have found a way around the no bail out clause in the Euro’s constitution the prospect of a legal challenge to Germany’s highest court combined with the fact that respected members and ex-members of the Bundesbank council have publically commented that the Court would probably rule no has ended the bail out option. Of course the rest of Europe could go ahead but somehow I always suspected that they wanted Germany to take the strain.
European Central Bank (ECB)
If you go down the shares of ECB membership as published on its website you get
The other nations are relatively small contributors.
Now take Germany out of the mix and the main contributor is France which gives me a wry smile as it feels like they are always telling everyone what to do and now is their chance to do it, however I suspect that would be met with a “mais non”. Next though we get two possible future recipients of a bail out Italy and Spain…… I think everybody can see the issues here.
Downgrade of the ECB
Let us be in no confusion involving the IMF in a rescue of Greece would go down badly with the ECB and has been called “inappropriate” by the ECB President. It fears two main things from such a rescue. The first is that its own independence would potentially be compromised, and the second is that the Euro zone would experience a loss of control over Greece. An example of this is that the biggest shareholder in the IMF is the United States as opposed of course to Germany in the ECB (remember this is a Frankfurt based institution).
Returning to Germany it was only at the beginning of this month that Chancellor Merkel was briefing the German cabinet that going to the IMF was the least likely option. Just as a reminder loans or using the state bank KfW were the preferred options at the time. So desperate are politicians to retain European involvement that they are talking of an IMF rescue with Euro zone funding. This would in my view be plainly unwise as it would go straight to the German Constitutional Court and so would gain nothing on the funding being provided directly. Frankly with suggestions like that they sound rattled to me.
Just to add to the confusion the French are still persisting with the idea that they can come up with a solution which would allow a bail out to get past the German Constitutional Court. Quite why they think that they are experts in German Constitutional law escapes me. Perhaps they are rattled too.
There has been an excellent chart of this in the Financial Times which is relevant here. Were the subject matter not so serious it would be funny,for the moment it can be put in the category of gallows humour. If it is blank please click on it and it should work.
So Europe is in complete confusion and disarray. Let us not forget Greece where does she stand now?
Some of the disarray has transmitted itself to Greece as the Greek Prime Minister George Papandreou said IMF involvement was a good idea and he would like the option and the Finance Ministry said that they denied any such thing. In fact Mr.Papandreou is showing signs of being seriously rattled too as yesterday he said that Greece “will not ask for help from EU or IMF”.If he has a plan to get Greece out of this alone and it works then he should get the Nobel prize for economics this year.
In the markets Greece’s ten-year government bond yields are now 6.28% which is 3.14% above those of Germany’s equivalent bund. Her sovereign credit default spreads are now trading at 315 basis points which was up 26 points on the day. So the impact of the announced (non) rescue plan has gone and we are back pretty much to where we were beforehand. In other words these are crisis levels for Greece.
This has been an utter failure for the Euro zone so far and does not help Greece at all. In fact the dithering and incompetence being displayed by Europe’s political “elite” is in danger of making the situation worse. I have been counting the main alternative plans and have come up with 5 as I type this. The only one with any remaining credibility would be the IMF taking over. It is sadly predictable therefore that I see European politicians talking of IMF involvement with European funding, there is enough Euro fudge in that to leave Greece thoroughly sick through over-consumption! Somebody perhaps should whisper in their ear that the objective is to make Greece better not worse. It is probably too Germanic even for the Germans to deliberately ruin Greece’s economy as an example for the others isn’t it?
As to my views on the matter I would like to take you back to the 10th February and my view on the requirements for a rescue plan.
“1. That action needs to be quick and decisive. A decent plan operated quickly is preferable to a perfect plan that is dithered about.
2. Such talk will improve markets but like the boy who cried wolf it only has a limited lifespan. So politician’s who feel that talk is sufficient (and I am sure there are plenty of them) must be made to realise that talk without action is only a short-term palliative”
and the IMF?
“I still feel that the IMF’s resources are likely to be under strain and Europe should take care of its own”
The only change is I would add “if it is capable” to the end of the sentence on the IMF.