Several people asked me to comment on The Telegraph article Germany signals shift on €2.3 trillion redemption fund for Europe by Ambrose Evans-Pritchard.
OK. Here goes. The headline is nothing but sensationalist silliness. There is no shift, and even if there was a shift, it could not possibly come in time.
“It is conceivable so long as there is proper supervision of tax revenues,” said a source in the Chancellor’s office. The official warned that there would be no “master plan” or major break-through at the EU summit later this month.
Mrs Merkel rejected the Redemption Pact last November as “totally impossible”, even though it was drafted by Germany’s Council of Economic Experts or Five Wise Men and is widely-viewed as the only viable route out of the current impasse.
Fast-moving events may have forced her hand.
Meaningless Political Statements
The statement, not even from chancellor Merkel, warned there would be “no master plan”, only that the idea was “conceivable”. That alone proves such a shift, even if it was real, could not possibly come on time.
This is what happened: “Fast-moving events” forced a meaningless statement out of an unnamed source in the Chancellor’s office, hoping to calm the market.
Simply put: There is no meaningful shift.
Chancellor Merkel Warns of ‘Limited German Resources’
Those seeking a dose of reality should consider Merkel Warns of ‘Limited German Resources’
June 14, 2012 12:21 pm
“Germany’s resources are not unlimited,” she told the German parliament in a declaration of her government’s stance before next week’s G20 summit in Mexico.
In a forceful restatement of the limits to German action, she reeled off a list of other countries’ demands for “big bang” solutions from Germany to solve the crisis, such as jointly-guaranteed eurozone bonds, a bank deposit insurance scheme, and most recently, a French-inspired financial stability package.
“Germany is strong, Germany is the economic engine and Germany is the anchor of stability in Europe. I say that Germany is putting its strength and its power to use for the well-being of people, not just in Germany, but also to help European unity and the global economy,” she said. “But Germany’s strength is not infinite.”
Bundesbank: Policymakers Should Refrain From “Wild Goose Chase” of Higher Firewalls
Inquiring minds seeking a dose of reality should also pay attention to an interesting speech on the The present state of the euro-area sovereign debt crisis by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, regarding the cause and solutions to the eurozone monetary union crisis.
Dombret does not speak for the entire Bundesbank, but I have no doubt his position is a representative viewpoint.
Please consider the following snips on increasing firewalls and entering into monetary unions.
Policymakers should refrain from a wild goose chase in pursuit of ever higher firewalls. Making the firewalls higher and higher will not resolve the crisis. Instead, policymakers should care that firewalls do not fall into a credibility trap owing to unavoidable political or financial constraints.
Generally speaking, a firewall cannot extinguish a fire. It only buys time until sustainable measures become effective. Therefore, the fire has to be extinguished by other means.
A disintegration of the currency union would be linked to extremely high costs and risks. That’s why such a scenario cannot be anyone’s goal. Yet this does not imply that Germany becomes open to blackmail and promises guarantees without control. This would indeed erode the stability basis of the currency union.
European authorities are not equipped with a supranational right to intervene in national budgets when member states do not apply the rules properly. Therefore, the fiscal compact – which has not been ratified by all member states yet – does not justify calls for monetary policymakers to further extend central banks’ balance sheets. Nor does it substantiate any extensive joint liability.
Against this background the recent proposals of a so called banking union appear to be premature. Such a banking union, potentially comprising a euro area deposit-guarantee system, a euro area resolution fund and common euro area supervision for the largest and systemically important banking groups could very well represent a sensible step forward. Yet it has to follow a deeper fiscal union as it would imply significantly increased risk sharing amongst countries.
Introducing a banking union without having established a genuine, democratically legitimated fiscal union would risk undermining the no bail-out clause and the disciplining effects of financial markets on fiscal policy. From a formal perspective it necessitates amending the EU Treaty – meaning it is very unlikely to be a short-term fix to the current challenges mainly related to recapitalisation needs in some banking systems, to political risks and to contagion effects within the euro area.
Dead Before Arrival
The Bundesbank and Chancellor Merkel are both against “big bang” solutions including joint eurobonds, a bank deposit insurance scheme, a French-inspired financial stability package, the ECB printing money, and every other nonsensical proposal put forth by nannycrats and mindless economists everywhere.
Please mark all such non-solutions dead-before-arrival as noted in Dead Before Arrival, Eight Lessons the EU Needs to Learn .
Deadlock Over What Comes First
Germany insists that a fiscal union must come firsts while Spain, France, and Greece want a banking union of any kind first.
A fiscal union requires massive treaty changes and ratification by German citizens. So would a banking union. The deadlock ensures more delays, but time is up.
Neither a fiscal union nor a banking union is going to happen, nor should they happen and the European monetary union cannot possibly survive in this deadlocked state.