On Merkel's Gamble
What to make of the Merkel visit to Athens today? What was she thinking about? Some possible answers:
A) Merkel is a political genius. She has seized on a historical moment. Ms Merkel’s trip has provided proof that she (and therefore Germany) stand shoulder to shoulder with Greece and its leaders.
She has traveled to a hostile capital in the face of growing dissatisfaction in Germany with the Greek bailout costs. She has, once again, stood defiantly in support of the EU, the Euro and Greece’s continuing in the Union.
Any lingering doubts that may exist about the commitment of the EU leaders toward full monetary union should be eliminated as a result of her State visit.
Draghi has said, “The Euro is forever”. That was a monetary commitment. Merkel’s visit to Athens should be considered a political commitment. Of the two commitments, Merkel’s means more than Draghi’s.
B) Merkel is an idiot. She has created the opportunity for a mass protest. The well-published report of 7,000 police in riot gear made it a sure thing that tens of thousands of people would show up in protest to her visit. She knew in advance that there would be images of the German “Nazis” that are taking over Greece. She also knows that these images will be in every magazine, newspaper and TV in Germany.
If anything, her visit will harden the opposition in Germany. This risks a domestic backlash. If the already fragile support in Germany falls further as a result of her trip, then it could accidentally accelerate a Grexit (quickly followed by Spanexit).
These images will not sit well with Germans:
C) Merkel is not an idiot and she does understand politics. She must see the writing on the wall. She is faced with an election in less than a year. There is absolutely no hope that the Euro crisis will be more stable than it is today. It is nearly certain that it will be worse. Merkel needs an exit strategy. The Athens trip will open a door for her. What's in store for the next 10 months?
I) - Spain will have to accept a formal bailout from the ECB in the not too distant future. The cost to Germany will be in the ten’s of billions. Italy will (probably) fight tooth and nail against an ECB bailout. But the prospect (and the need) for an ECB/IMF - Italy deal will be front and center right at the time of Merkel's re-election effort.
II - Merkel also knows that she has to carry all of the weight from now on. She once had a partner with France and Sarkozy. That partnership went bankrupt; Merkel got stuck with all the liabilities and none of the assets.
III - The new Socialist government of France has taken steps that insure that France will lose competitiveness versus Germany at a very rapid rate. France will become Spain over the next few years. Merkel knows this today. The German people will understand it a year.
Merkel went to Athens knowing full well that her visit would demonstrate the impossible situation that Greece is in. She wanted to see riots in the streets. She wanted the scenes to infuriate the German people. She wanted to force the issue to a boil. She needed to show “Pan Euro” intentions as she already has invested so much in that effort. But her effort was a fake “brave face”; her motivation was to create an excuse for her support to fade as she cedes to the popular “will” that she herself has created.
I’m not sure which one of these is right. I think they cover the gamut of possible scenarios. Whether she intended to or not, it is quite possible that her trip will mark a decidedly negative turning point for the Euro experiment. The FX market isn't happy today.
Note: I don't buy the Citi explanation for the Euro's drop today. (Link) This drop is good old supply-and-demand, not a misread of a screen.
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