Europe's Beggars: Bluffing Their Way To Unity And Propserity Via Hijacking And Extortion

Tyler Durden's picture

Ten days ago, when predicting what may and likely will be the outcome of the August ECB announcement, we said that it is virtually certain that it will follow in the trailblazing footsteps of what Mario Monti did at the June 29th meeting. To wit: "The bottom line here is that Draghi most likely pulled a Mario Monti (and his hanger on Mariano Rajoy), and spoke up before pre-clearing with Buba's Weidmann. Draghi thinks that, like Monti with Merkel at the June 29 summit, he can bluff the Bundesbank into submission, and Germany will agree to monetization, especially if markets have risen enough where nothing out of the ECB next week leads to a market plunge. The problem is that as we patiently explained, Monti got absolutely no concessions our of Merkel, as was seen in the bond yields of Spain after the June 29 summit." Sure enough, the market soared in the days after June 29 as well, giddy with optimism that Germany would never settle for being bullied publicly and had implicitly agreed with the Monti and Rajoy. Euphoria promptly turned to despair as it became quickly clear that Monti had bluffed without preclearing with Merkel and Buba. Fast forward one month, and what we expected to happen is precisely what did happen.

The WSJ explains.

During an all-night European summit in June, Mario Monti, the Italian Prime Minister, gave German Chancellor Angela Merkel an unexpected ultimatum: He would block all deals until she agreed to take action against Italy's and Spain's rising borrowing costs.


Ms. Merkel, who has held most of the euro's cards for the past two years, wasn't used to being put on the defensive.


"This is not helpful, Mario," Ms. Merkel warned, according to people present. Europe's leaders were gathered on the fifth-floor of the European Union's boxy glass headquarters in Brussels, about to break for dinner.


"I know," Italy's premier replied.


The nine-hour confrontation between Italy and Germany that night led to a compromise that wasn't the sweeping action Mr. Monti wanted. But it has helped pave the way for a possible intervention by the European Central Bank to stabilize the teetering bond markets of Italy and Spain—a high-risk step that could be Europe's last chance to save the euro.


The Italian-German conflict has also exposed a deep philosophical fissure at the heart of the euro zone: Are painful reforms and austerity in countries such as Italy and Spain enough to restore confidence in the common currency, as Germany has insisted? Or do they need Europe's collective financial support while they fix their economies, as Mr. Monti argues?

And therein lies the rub: Germany, which arguably got the long end of the Eurozone stick for a decade and now has the best economy (albeit rapidly deteriorating, which as we explained before is why the periphery's leverage is collapsing with every passing day), got the best deal of all European nations. As such, it is relatively easy for it to preach fiscal responsibility, reform and austerity: after all it itself does not have to succumb to what it preaches.

The periphery on the other hand, realizes that it is unable to engage in painful bouts of fiscal reform: by the time any one cycle is complete, the electorate will be so furious, the politicians in power will have been long swept away, replaced by socialists and other anti-austerians, who will undo everything that has been done (see France). Thus, for them the motivation of game theory is vastly different: short-term stop gap measures at all costs, while praying a Deus Ex Machina appears on the doorstep and fixes all problems. Naturally such a thing will never happen, but when it comes to the mechanism to provide short-term bridging, it is precisely the one that Germany is disinclined to pursue: the ECB's, and the threat of runaway inflation.

After all, recall that it was 4 short months ago that Europe saw all time record Brent high priced in EURs. All it will take for a continent-wide spike in inflation will be another LTRO, or some other ECB intervention.

Germany knows this, and it knows very well that from the periphery's point of view this form of Apres Moi, Le Deluge makes perfect sense, even if it means destroying the quiet, cozy lifestyle of 80 million Germans. It also knows that stopgap measures will achieve nothing, will not resolve Europe's fiscal problems, and that all such interim steps are for nothing.

What it also knows is that it is best to give the impression that the periphery has "won" if it means delaying the inevitable day of Eurozone unwind, even if it means losing face in the court of popular opinion if only for a week or two.

Because as we will not tire of saying, for Germany the only upside from now until the inevitable unwind, funded via Bundesbank's sunk TARGET2 liabilities to the tune of €1-2 billion/day, is to keep pressure on the EUR and see the European currency get weaker at any cost: after all boosting its private, export-driven sector is the only trade off Germany has to funding Europe's unrepayable current account deficits via public funds. Even if it means appearing to be bluffed out month after month by Europe's beggars who are now consistently choosers.

Neither Monti, nor Draghi grasp, that even in a game of Mutually Assured Destruction, ultimately he who has the gold, and the best prospects for survival at Day T+1 is who orders the music.

Sure enough:

Last week, ECB President Mario Draghi disappointed markets' hopes that the bank would act right away. But he said the ECB "may" soon buy bonds of crisis-hit countries that meet certain conditions established by European authorities.


"If I were Draghi, I would feel morally and politically protected in making bold moves at the right moment," thanks to the June 28 summit outcome, Mr. Monti said in an interview soon after the summit. In a conversation on Monday, Mr. Monti described Mr. Draghi's comments last week as a "bold move" that is starting to define the "operational terms" of the late-June summit.


Mr. Monti didn't comment on Mr. Draghi's condition for ECB aid—that Italy and Spain first apply for bond-market support from Europe's bailout fund and sign a list of economic-policy promises. Such a move could be politically risky for Rome and Madrid, since it would likely be construed as tantamount to a loss of national sovereignty.

Monti's assessment of the situation is precisely what we said would happen back in May of 2010 with the first Greek bailout: soon everyone would realize that they can push Germany until the breaking point, but not any further.

"What we ask is that European authorities certify Italy's good conduct by translating that into interventions to keep spreads within reasonable limits. I have often told Merkel that, if this isn't done, she risks finding herself before an Italian parliament that repudiates Europe, monetary stability and the euro and is not friendly toward Germany," he said.

And as we showed over the weekend that breaking point may be arriving faster than anyone expected:

Ms. Merkel, through her spokesman, declined to comment for this article. Yet senior German officials admit Mr. Monti has a point. Investors are fleeing Italian and Spanish debt, even though Rome and Madrid are shaking up their economies. That means Europe needs to do more to help its two large Southern members. But the cautious chancellor fears massive bond-market intervention could trigger a political backlash in Germany—and might not work, according to people familiar with her thinking.

The cognitive bias got so bad even Obama got involved:

Contrary to the bailout fund's present rules, Mr. Monti didn't want Rome and Madrid to suffer the stigma of applying formally for aid or signing a list of policy demands written in Brussels, fearing this would undermine his public standing at home, as well that of his ally, Spain's premier Mariano Rajoy.


At a late-night discussion in Mexico with key European leaders, U.S. President Barack Obama supported Mr. Monti's plan, according to people present. But Ms. Merkel dismissed the idea. Over the past two years, she had justified financial help for other euro nations to skeptical German voters by promising there would be a quid pro quo of tough, internationally supervised reforms. Now Italy wanted Germany's money with no strings attached.


Mr. Obama couldn't talk the euro-zone leaders into agreeing.


Mr. Monti didn't give up.

Here, as we showed over the weekend, is where the weakest link of the ECB plan is: it will mandate that Spain and Italy throw in the towel sooner or alter, and demand a bailout. Because the central planners' attempts to make discounting future events irrelevant and offset purely by loud speeches and even louder promises is doomed to failure.

Yet the events of the evening of June 29 is precisely why not only the ECB, but the entire European experiment will fail:

The evening before the meeting, Mr. Monti hatched a plan to hijack the summit. Unless Ms. Merkel accepted his proposal on bond-market intervention by Europe's bailout fund, Mr. Monti would veto the growth pact—stymieing Ms. Merkel in her parliament.


Italy had previously lobbied for the growth pact, so Mr. Monti's threatened veto—announced just before Europe's leaders were due to sit down for dinner—was a bombshell.


"But we need this result this evening," Danish Prime Minister Helle Thorning-Schmidt said about the growth pact. "This is a dark moment," EU Commission President José Manuel Barroso said.


The summit was at an impasse. French President François Hollande briefed reporters on the closed-door events, adding that he sympathized with Mr. Monti's stance.


Mr. Monti's blockade lasted until 4 a.m., when leaders finally agreed to a text hashed out by their aides. It promised that Europe's bailout funds would be used "in a flexible and efficient matter" to stabilize the bond markets of vulnerable euro members.


It didn't go as far as Mr. Monti had originally wanted: Italy and Spain would still have to apply for any aid and sign a policy memorandum. But by planting the need to stabilize bond markets in the declaration, Italy had convinced Germany to recognize Italian reform efforts and pushed its approach for tackling the crisis into the spotlight.

We have bolded the key word above: "hijack." That word makes total mockery and sheer irony out what is now the biggest oxymoron in existence: European Union. Because one can not hijack a union. One can not force, bluff or otherwise intimidate borderline willing partners who rightfully believe they are being taken advantage of into submission. It just doesn't work : it certainly didn't work then...

Markets weren't fooled for long. Italy's borrowing costs rose to as high as 6.6% in late July, in new signs that investor demand for Italian debt was shriveling. Skeptical investors know the euro zone's bailout funds aren't big enough to prop up Italy's huge bond market on their own.

...And it won't work this time. Only it will be Monti's this time oddly prescient words that will finally release Europe from the shackles of an experiment that is becoming hated everywhere, both at the core and the periphery:

"I have no doubt that the night before the disintegration of the euro, the ECB will do whatever is necessary to save it," Mr. Monti says. "The question is: Do we need to get to the night before?"

Goldman's alumni Mario Draghi and Mario Monti certainly feel the answer is no. After all there are bonuses for Goldman partners that can be paid only if there is visibility into the future. For Germany, the answer was, is, and will be a resounding yes as explained. The only problem is that, just like Hank Paulson showed, when the time to actually commit and act, the ECB's action of "whatever is necessary" will be proven completely and utterly hollow and futile.

It will also be the moment of Europe's salvation through fire: because after several years of acute pain, an entire continent full of "Icelands" will be reborn, even as America continues to stick its head ever deeper into the sand of denial.

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Xibalba's picture

I know how Merkel got elected to office, but I'm still unclear how the rest of 'em got there.  

Precious's picture

These people are like wannabes dressing up to watch the stars walk down the red carpet.

Red indeed.  The Chinese have all the money now, and they are nowhere to be found.  Get used to it.  That's the same reason unemployment is high outside Asia.  Who needs whitey.  

Seasmoke's picture

you cant win Hold Em , unless you are willing to bluff

bank guy in Brussels's picture

Not really so much a bluff game, or a weak foray by Draghi, according to Ambrose Evans-Pritchard (AEP) in the UK Telegraph

It is amazing how different the perspective is now, between ZeroHedge and AEP ... and my contacts in the EU say that AEP is seeing the game more correctly than ZH -

That Merkel and evan Schaüble have already agreed the ECB will print and inflate when the pressure is on - despite the political firestorm in Germany as Germans get ready to reverse on their longtime posturing -

ZH is not carrying such emphasis now, but it has carried pieces before, indicating that Germany must join the euro printing and inflation game to try and save its own banks, insurers and pension funds ... Germany is as vulnerable as anybody ... Reggie Middleton saw this, his funny comment that it is just 'Germany has the penthouse suite at the roach motel'

Ultimately the EU authorities and Germany will try to 'save the euro' ... ZH is right though it may all blow up anyway ... especially Italy could leave, Berlusconi may be the one who breaks the euro ... leaving the euro as perhaps the currency here in Belgium and Luxembourg and maybe the Netherlands ...

From AEP and the Telegraph, in his latest:

« Mrs Merkel and finance minister Wolfgang Schauble back ECB action ... Hans Redeker, from Morgan Stanley, said ... “We’re moving into a phase of ECB monetisation. No investor can afford to lose out on the sugar rush,”

Poor Grogman's picture

All I can say about that, is if they are going to monetize they better have some serious amounts of gold bars and coins ready to go immediately, because when the Germans start turning every electronic and paper euro they possess into gold it will rip the bankers a new asshole and make their eyes water.

Ghordius's picture

1+ "It is amazing how different the perspective is now, between ZeroHedge and AEP ... and my contacts in the EU say that AEP is seeing the game more correctly than ZH"

and still both are full of strange concepts and totally flabbergasted about some key issues. to generalize, ZH has an US view and AEP has a British view. To generalize even more, both are at loss on how the eurozone multi-party parliaments really function.

One example: both don't understand that Berlusconi's party is backing Monti's technical government while undermining it politically.

Another: both don't understand the key issues driving the German's CDU/CSU and SPD.

Yes, the ECB will print - no, it won't print with gusto. One key element is that the ECB does not have to support the stock markets, for example.

MillionDollarBoner_'s picture

Yes, Super Mario will print.

Shortly after, Germany will return to the DM.

Read "When Money Dies" by Adam Fergusson. Living next door to the hyper-inflation was beneficial for France and Belgium. The French and the Belgians simply crossed the border and loaded up on discounted assets. The poor Germans were desperate for any currency but DMs. This time it will be vice versa.

Remember - Beggar thy neighbour and then you can go buy his stuff for a song ;o)

Poor Grogman's picture

"When Money Dies" by Adam Fergusson"
One of the best books on money out there.

Ghordius's picture

I read that book, it's ok, but if you really, really want to understand those times you have to read Costantino Bresciani-Turroni's book.

Germany leaving the EUR? Perhaps, when the times are different. At the moment, no. The Germans know too well what would happen with the DM, they have the CHF in front of their noses showing how difficult life can be for a small currency in this current environment.

Nobody in all the financial press does ever question how this crisis would be with 17 different currencies in the eurozone. A pity, Bastiat would not be happy.

Poor Grogman's picture

Divorce can be messy.

But then the alternative can be VERY expensive..

Messy or expensive...

I suppose they could always resort to rock paper scissors?!.....

lolmao500's picture

Let's talk about American criminals... BoA for example...

BoA Drills Safe Deposit Box and Removes Heirlooms

vinu02's picture

and the rally continues because algos think easing will come someday in this decade. PIIGS is already busted but market is liking it

slewie the pi-rat's picture

they are gonna ruin the rest of angela's vacation and she is gonna go mama-bear ursuline on their NW0 asses when she gets baaaack!

Dr. Engali's picture

I don't know who the bigger clown is in this play. Draghi for opening his big mouth, Monti for his arrogance, Merkel for not putting her foot down, or the market for buying any of this crap. It's hard to believe the world is lorded over by such incompetence. Is there anybody out there... Anybody willing to do the right thing?

Poor Grogman's picture

What if the "right thing to do" is to just stand aside and watch the whole thing come down?

That would explain a lot....

poldark's picture

Yes, what is the right thing?

Most economists think the right thing is to have political and fiscal union with a common taxation system and then start printing mountains of money. Thing is the PEOPLE of Europe do not want it. In fact most Germans want to leave the euro and even the EU. Anti EU parties are gaining strength in all the EU countries.

I would like to see the end of the EU dictatorship and a new union formed with the will of the PEOPLE.

TWSceptic's picture

Yes the EU is a failed political project / experiment, politicans however will never admit they failed and they will try to continue until everyone goes down with their idiotic project. The solution lies in the still partly sovereign countries and the sanity of their citizens to start leaving this clusterfuck of a union, before it's too late.

Piranhanoia's picture

How much gold have the poorer countries in Europe purchased to protect themselves against their Euro?

Elliott Eldrich's picture

I know it was just a typo in the title of this article, but the term "propsterity" is just too good to let go by. I'm thinking this could be the perfect word to describe the global economy.

"Propsterity" - just let that roll around for a bit and see how it feels when you say it. Don't it just feel so... right?

q99x2's picture

Hope it ends like that.

chump666's picture

The Germans are getting played by two idiotic Italians.  C'mon grow some f*cking balls, tell the ECB to f*ck off into oblivion.  So what the market tanks 40%, equities rallying now are only the inflation trade since central banks are forcing speculation.  Wall Street can suck it. 

Merkel, China your main customer is about to implode and explode at the same time, the EUR is going to parity on massive USD buys next few months.  You are going to be slammed with inflation. 

The Germans will want their old currency back.


Joe A's picture

People don't like hijackers, especially when they are beggars who think they are choosers. Negociations with hijackers only go that far. After that -when the right moment arrives- you take them out. That is the game that is being played in this wonderfull EU full of "brotherhood and unity". And then of course there are the elections coming up next year in Germany. A potential game-changer.

DutchDude's picture

watch september 12th. Karlsruhe on ESM and Dutch elections. Extreme left (Socialist Party) AND extreme rightwing parties (Freedom Party) will get a landslide victory. Both not a fan of de EMU/EU crooks.

Holland pays a relative high price due to it's strong economy. Guess what will happen when the parties above will get in charge?

Then, when the Karlsruhe will find the ESM conflicting the German constitution; S will HTF in Europe!

That's a long month for the PIIGS to get money with only about 60bln in the EFSF left. Only saviour left is the ECB... o, wait...

zebrasquid's picture

"Propserity"?  Is that the term for an economic policy based on propping things up? 

MillionDollarBoner_'s picture

Yeah - with just a hint of austerity ;o)

ebworthen's picture

I think I'm going to start following this central banker (Washington/Wall Street) model of intentional failure to get cash and tax breaks and other goodies from the system - seems to be all the rage - and the responsible are just getting beat over the head.

Pretorian's picture

Monti wants new bond intervention so his friends will unload Spain and Italian bonds to ECB and then we can have restructuring again,like with a Greece.Send the bill to tax payer. Just send this Goldman clowns behind bars and everything ends in hour.

MillionDollarBoner_'s picture

Try looking at the Euro Experiment from the point of view of a drug pusher. The first taste is free. Then y'all has to pay, pay, pay.

The Periphery (PIIGS) were always broke-ass countries, whether due to poor natural resources, laziness and/or corruption. They were at best a cheap place to go on holiday. Suddenly here was this Sugar Daddy, offering cheap money at low rates, nothing down, four years free interest, then low, low interest rates, in perpetuity. They even had friends (GS) who could make life even easier. What's not to like?

Now, once you get a serious habit, things start to change. You lost your job because you always turned up stoned and now a foreighner is working in your place. You sold your house and rented something cheaper but the rent has gone up while your dole money has not. You dumped your car because it was just another overhead and who needs one anyway (until you need to go find a job). You just gotta have that fix but The Man is holdin' out on you.

Pretty soon you are on your knees, doin' what has to be done to get your next fix. You know you should just quit but you can't face the cold turkey and besides, what's to live for. Do you really want to go back to your shitty low-life existence, peddling deck-chairs or dancing the Mazurka for grinning fools? You're better than that right? You don't need that shit! But hell, you're hungry for that next fix.

So you crawl, whine, threaten, cry and generally behave like a bitch until Daddy let's you have a taste. Just a little to keep you going. Now, time to be nice to Daddy...

You get the picture. The only real way out is Cold Turkey and then accepting life as it truly is. Once you reach that point - once the monkey is off your back - you have a chance to start rebuilding your life. So long as you have the strength to "stay clean". And so long as you are willing to live within your means, not on someone else's favours.

Until then, you are what you say it, bitch!


Ghordius's picture

are you sure you are not confusing the $ource of this $ugar with the m€dium of transmission? I don't think that the Squid et al would have had really big issues in adding an additional layer of currency derivatives in order to make the same pushing "risk free".

what you are describing is forced dollarization. the EUR was built in order to cushion some parts of the currency war that started with the crowning of King Dollar, in 1971.

MillionDollarBoner_'s picture

GS only provided the Interest Rate Swaps - a sideshow, not the main thrust of my argument.

I'm just trying to say - easy money is like a drug but just like a drug, addiction is too easy and breaking the habit is hard to face up to. The result is a lot of piss and wind before finally taking the medicine - or accepting life as someone bitch, in which case just STFU.

icanhasbailout's picture

I have it on good authority that Germany would never support a policy that allowed them to build and sustain an export economy through a mechanism that artifically lowered their neighbors' competitiveness.