Ambrose Evans-Pritchard's Contrition
In a fiery article written today, Telegraph's Ambrose Evans-Pritchard unleashes a scathing critique of Europe's AAA club for daring to demand that Spain actually follow through with what they have been pretending to be doing, namely cutting spending and promoting improved government tax collections. We now know that Spain did neither, with spending increasing while tax revenues dropped from last year (and as we will not tire of pointing out, if the government has lost sight of the ball, and the economy is collapsing, it is not due to a cut in spending but due to its own inability to govern - something the people in a democratic regime usually are quite capable of fixing on their own). But complying with agreements in a broke Europe is not part of the New Normal. His summation, phrase briefly is as follows: "We discover – yet again, you might say – that Germany, Holland, and Finland will not stand behind their solemn pledge of solidarity when push comes to shove. Spain’s premier Mariano Rajoy has been betrayed. Nobody should be entirely surprised if he and the Spanish arch-nationalists in his circle offer a condign riposte, and bring down the entire temple on the heads of the creditor powers." Of course, none of that is true, and what Germany, Holland and Finland are doing is doing their best to get dragged into the money pit that the rest of their insolvent socialist neighbors can so efficiently dug in the last several years.
What the article really is, is simply Ambrose's contrition for misreading the balance of power in Europe. Like so many others, he was all too eager to swallow the misdirection narrative that as a result of Mario Monti's stubborn gambit at the June 27th Euro-summit, the balance of power had finally shifted from the exporting, rich and quite solvent nations, to their liquidity and bailout addicted neighbors, something we claimed all along was a major mistake (see "Europe's Beggars: Bluffing Their Way To Unity And Propserity Via Hijacking And Extortion").
The truth is, at least so far, that nothing in Europe has actually changed, with Germany still calling all the shots - after all they are and always will be Europe's paymaster - and while some may say the ECB eeked out a victory over the German faction (read Weidmann) in the governing council, this too is so far a chimera: so far the ECB has done absolutely nothing due to the conditionality clause, which as Rajoy has demonstrated, is proving to be the biggest stumbling block as it means an overhaul of the top, and the effective ceding of sovereignty to yet another technocratic authority.
As one may expect, Ambrose's expiation is full of sound and fury. To wit:
This deal has been breached. Can we believe anything that the Chancellor of Germany, the prime minister of Holland, and the prime minister of Finland say from now on? The EMU rescue edifice is built on sand.
You might say Mr Rajoy had no choice. But he did. There were those whispering in his ear that Spain should instead retake control over its own monetary, exchange, and sovereign policy levers, and break out of its debt-deflation trap.
Such a course might or might not be disastrous for Spain, depending on your analysis of EMU’s structural flaws, but it would certainly be disastrous for German and Dutch banks. (Given that it would cause the collapse of monetary union in the worst possible way).
Perhaps a better question is can we believe anything that Europe's insolvent, bailed out countries say from now on, or ever. Just one case in point: Greece, whose economy has never been worse, which has promised for 3 years now to get its act together, and which merely requests more and more aid. Or Italy: remember when the now defunct SMP was used to buy Italian bonds last summer on strict conditionality, which Berlusconi completely forgot about, and which led to his downfall after the then-brand new ECB head, Goldman's Mario Draghi refused to buy Italian bonds for a few weeks, leading to record Italian bond yields, which also led to Berlusconi's resignation and replacement with another Goldman puppet? Or, for that matter, Spain?
All these questions are conveniently ignored, instead the fingerpoint is focused on Germany, for, get this, being smarter than the rest and taking the most advantage of the Eurozone which the ability to grow debt was still there, and everyone was doing great.
The Spanish bubble was after all a joint venture. Spain was flooded with cheap capital from Germany and Holland that it could not prevent or control under the EMU system. Did the German and Dutch regulators recognise the danger, or try to stop the excesses? Not really. They were complicit.
Sure, one can assign blame, point fingers, and bluster until one is blue in the face, but the argument that "it's only fair" only works in hard core socialist nations. Luckily not everyone has gone down that path just yet.
Which then brings us to the crux of AEP's argument: Spain should just leave and stick Germany with the bill:
Mr Rajoy’s authority is collapsing. Some 84pc of Spaniards have lost confidence in his leadership. The current course is becoming hopeless.
Today he will announce a fresh round of austerity measures to meet EU targets that cannot be met, adhering to reactionary strategy of "internal devaluation" imposed by Germany that is destroying his country.
And now he has just been betrayed by the German bloc anyway. Es el colmo. If he were to request full sovereign rescue, he would most likely be shafted again. Who can blame him for dragging his feet?
The temptation to tell the Germans and Dutch to go to Hell – and to pull the pin on their banking systems – must be growing mightily. Desperate men do desperate things.
This argument is based on the assumption that a collapse of the Eurozone which would surely follow, would damage Germany more than it does Spain. This is quite debatable, and so far nobody knows just who will suffer the most: more than anything, there is political gaming of public sentiment than actual hard data.
As a recent example, none other than the FT's own Euroexpert Martin Wolf explained "Why exit is an option for Germany." His argument is spot on: there will be pain but in the end of the day, Germany will survive. The question is what will happen to the already insolvent PIIGS in the meantime.
What the debate about Europe really boils down to is simple: who has the upper hand - the countries that still have vibrant, if deteriorating economies, such as the AAA-club, or those countries which are a lost cause without endless monetary and fiscal support from outside. It is no surprise in this context that Europe, which is increasingly becoming wary of Germany, has fully backed Obama, and his particular approach to "wealth redistribution" by promising, as was noted previously, that it would not make waves until he is reelected. The next question then is how much will US taxpayers enjoy bailing out Spain, Greece, Italy, Ireland etc, if and when Germany does pull the plug. But that bridge will be crossed in due course (if not too long down the road).
For now, what is certain is that the current scorched earth campaign, in which Germany needs a weak periphery to keep the EUR weak, and its export industry strong, is on a collision course with the "welfare" of everyone else. Will Germany finally agree to persist in demanding what is best for its people, or will it succumb to the insolvent, socialist world's fairness doctrine? Today, AEP realizes that the answer is, at least for now, a resounding no. We can see why he is angry, but that does not change the reality that in Europe the insolvent periphery never had the upper hand, and most likely never will. Instead, as has been the case all along, it will be used for whatever political and economic purposes Germany has in mind, and then, when the ability to transfer any wealth via current account funding courtesy of TARGET2, it will discard these countries.
As for AEP's assumption that Spain (and its insolvent brethren) have all the leverage, we will likely soon find out. By now it is obvious that Greece is a day-to-day basket case, whose presence in the common currency is increasingly uncertain. And once Greece is out, everyone else will rush for the exits.
If nothing else, then at least we will finally find out just who had the most to lose from the unwind of the most contrived monetary experiment in modern history.