A Few Thoughts On The Euro Crisis

Just as a communist might argue that "true communism" has never been tried, dismissing the Soviet Union, China et al as flawed implementations that don't invalidate the basic model, you could argue that there's never been such a thing as "true capitalism" or "free market" outside of say the local car boot sale. To a greater or lesser degree governments have always put their oars in, special interests wielded their baleful influence - and individual capitalists done their best to establish monopolies or cartels, destroying the market.

But, at least as far as the post-war period's concerned, all that pales into insignificance compared to today's interventions. For at least the last four years, all investment decisions have turned on what governments will do. As Jonathan Weil put it three years back :

"... the clearest path to making money in the public markets is to know in advance what the government plans to do next ... and when - and then trade on it. Let there be no doubt: Plenty of people with access to such inside information are enriching themselves this way now."

Prime example in the UK - the Bank of England Pension Fund, who moved the bulk of their assets into inflation-proofed securities when they started printing money.

Today's big question - will Germany either

a) print ?
b) bail out Southern Europe ?
c) neither - at which point defaults start, absent
d) Euro-area fiscal union - with Germany running the show hands-on, because while they may trust the Irish, Dutch and Finns, they can't trust the Greeks or the Italians, and maybe even the French ?

Now either a) or b) will see a surge in global stock prices - even though it won't actually address the "structural imbalances" - a PC way of saying that the Germans are German and the Greeks are Greek. It's just kicking the can down the road for another few years - but when have the markets worried about the long term ?

c) will see a collapse of prices, the break up of the eurozone and perhaps 2008 all over again, until the realisation dawns that the sky hasn't actually fallen and that Spain, Italy and Greece are better off with their own currencies (though leaving would be seen in all of those as a national humiliation). But the "imbalances" would at least be fixed.

d) - "now this is the d you can't see, said the cat" - can you really see German civil servants and Bundesbank officials sitting in Greek government offices and out enforcing tax collection ? Not at all sure I can. If anything was likely to cause major friction 'twould be that - and I don't think the Germans want to be Europe's police and civil service. They'd just like the Greeks and Italians - well, to be more like Germans. We can all dream.

And, talking of major friction, I'm yet again impressed by the UK left - for the last 20 years we've been hearing from them how much more sensible and better-organised the Europeans are, and how the awful little Englanders just don't appreciate how much better off we'd be in a closer European embrace.

But now they're warning that if the Euro breaks up, the continent faces descent into war. I heard Richard Horton, editor of the Lancet (of "Everyone Dead in Iraq" fame) on Any Questions (in Ely) a few weeks ago. Asked about the possibility of the Greeks leaving the Euro, he launched a hysterical rant on the subject of 50,000 Jews being deported from Greece during WW2 and implied that a replay was on the cards in the event of a Greek exit. Apparently the lovely Europeans, who we should all strive to emulate, are only restrained by the EU from slaughtering each other ... looks like a late conversion to the Peter Hitchens thesis (written, admittedly, before Britannia went on crack and started working the streets) that "Britain is the only virgin in a continent of rape victims".

To be fair, the left is being given ammunition by a host of Eurocrats fearful for their jobs. I'm not at all surprised that Herman van Rumpy-Pumpy waves the grisly spectre. Where else would he get so much money and power ? But I think the Polish Finance Minister needs to take an aspirin and have a lie-down, rather than warning, as he did last Monday, that Euro breakup would lead to a European war.

Now all the way along Germany's been saying "we will do what we have to do to support the Euro" at the same time as saying "we won't print or bail out". Does not compute.

The conventional wisdom is that the Germans won't print because they're scarred by the memory of Weimar and wheelbarrows, although that took place nearly 90 years ago. Not so, according to a commenter at FT Alphaville.

"the Weimar hyperinflation is often cited as the main reason for Germany's 'obsession' with sound money. But visiting Germany frequently on business and speaking to Germans I doubt that. Most people alive today did not live through that period.

The real reason is that post WW II-Germans got used to their DM as a reliable store of value and kept on doing that with the Euro. Only 40% of Germans are home-owners, as indeed, under a stable currency renting often makes more financial sense. Germans don't invest in the stock market but prudently put their money in cash in a savings account.

Hence, the typical German family is completely unhedged against inflation, and is therefore worried about it.

For the average German who has worked and saved 20 to 30 years, it is actually a better prospect to live through a deflationary depression and have a 30% chance of being out of work as opposed to seeing his life's savings wiped out through currency debasement. That's what's driving German politics, not the Weimar memory."

In the buy now, pay never UK the chancellor can take a political decision to bail out borrowers by printing, to the detriment of savers - because borrowers massively outnumber savers. In Germany the prudent ARE the electorate.

So will Merkel print ? IMHO yes - once a big enough disaster has happened - maybe a Greek default or euro-exit. She'll remember all the promises that were made to the electorate when they lost their beloved DM - then she'll break them.

But that's predicated on the guess that she won't want to be the one bringing the Euro down. And I might be wrong (to be honest, I think that massively ripping off the responsible and sober German electorate is far more dangerous than Greece or Italy defaulting).

Any ideas ?