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Professor Roger Bowden

The Euromess: Irresistible forces, immovable objects, and economic realities

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You’ve got to hand it to the jocks in the financial markets. My German co-author, who knows a bit about such things, tells me there’s already a spread trade going in credit default swaps (CDS). I won’t bore you with the details, but the trade amounts to an indirect bet, based on French sovereign debt, that Francois Hollande will be gone in 5 years time. Either that, or he’ll retreat into the safety of the pack.

Francois Holland, you’ll recollect, is the President-elect of France. He got there not just because he looks cuddlier than Sarkozy, but on a platform of renewed public spending. Things like 50,000 additional teachers and civil servants, restoring the pension age, urban renewal, and infrastructure projects. All very Keynesian and good, as a way out of recession.

But how to finance it? Yes, you can tax the rich, but there’s not all that many of them, and they’ll make themselves even scarcer once the tax is announced. How about printing money? That’s hard, because the French central bank can’t do that without the OK from the European Central Bank. So unless he can tap into the Eurozone for the money, it will mean issuing more French sovereign debt. But there’s already so much out there; indeed the interest bill is the second largest sink for government spending behind education, and the sovereign debt ratio at 89 % is well north of the agreed 60% target.

So there it goes, the bell for the opening round! This one will pit the challenger, Frankie Hollande, socialist champion of the Bastilles, against the defender Angela Merkel, the pin up girl of the Christian Democrats in Germany. Little Angel will have punch well above her weight on this one, especially now there’s been a socialist triumph in one of her own state corners. She’ll likely concede a few points, by consenting to an increase in the capital of the European Investment Bank, which might finance some of those French infrastructure projects, though not enough to pack much of a punch.

OK, how about issuing Eurobonds, liabilities of the European Commission as a whole? The Merkel corner won’t like that, for if the French (Italians, whoever…) can finance by drawing on Eurobonds, that becomes a liability for Germany, in effect the major guarantor. Moreover, M. Hollande wants to relax the Eurozone fiscal compact, a long standing agreement (all of 2 months) which inter alia requires a government budget deficit of no more than 0.5% of GDP.

In the meantime (all of two days, in fact), Frankie has been sniping at poor old David Cameron, the embattled British slugger, about a financial transactions tax, which would flow into Eurocoffers and from there to France. It would kill the City of London, so it isn’t going to happen. And while all this is going on, the Greeks are in political freefall, unable to form a government. Worse still, the parties that look like they might have their hands on the levers of power have some nasty sharp edges, not to mention bad haircuts for the Golden Dawn heavies of the extreme Right.

Your guess is as good as mine on how all this will play out. For a while, I thought the Greeks would have to leave the euro, but the polls for their June 17 election seem to be swinging back the other way. The Germans will eventually find some face saving way of giving in both to the Greeks and to M. Hollande and his socialist allies in the French National Assembly. The European Central Bank will cave in under pressure and start printing money big time, via the national central banks.

Most important of all, the eurocrats in Brussels and elsewhere, who got us into this mess, will survive. They’ve been quick to climb on board the infrastructure bandwagon, greeting with glad cries the notion of expanding the capital base of the European Investment Fund, and proposing the use of EU guarantees for private sector projects. With an army like that in his corner, can Frankie ever lose? Those CDS traders might just lose their shirts.

In the meantime, what of all those voters? The backlash that projected the socialists into power is easy enough to understand. It’s hard enough to lose your job; harder still to know that your kids may never find one; and the last straw to read reports of the mega millions still being raked in by company executives who prospered while their companies crashed and burned1.

But can the aspirations of the southern European rank and file ever be met – or is this a descent into third world status on the back of structural problems with their economies? What are the implications for our part of the world; and what can we do about it? Big picture stuff, this. Log in week after next.