Merkel Channeling Antony Comes to Praise Euro While Burying Its Investors
Angela Merkel, Germany's chancellor
Michele Tantussi/Bloomberg
Angela Merkel, Germany's chancellor.
Angela Merkel, Germany's chancellor. Photographer: Michele Tantussi/Bloomberg
Dec. 16 (Bloomberg) -- Thomas Mayer, chief economist at Deutsche Bank AG, discusses the European sovereign-debt crisis and Germany's role in containing future debt shocks that may threaten the euro. Mayer speaks from London with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
Germany's chancellor Angela Merkel
Jock Fistick/Bloomberg
Every time German Chancellor Angela Merkel talks about how investors will have to swallow losses in future debt crises, financial markets shudder.
Every time German Chancellor Angela Merkel talks about how investors will have to swallow losses in future debt crises, financial markets shudder. Photographer: Jock Fistick/Bloomberg
Every time German Chancellor Angela Merkel talks about how investors will have to swallow losses in future debt crises, financial markets shudder.
Irish 10-year bond yields climbed to a record on Nov. 2 after Merkel said the European Union was drafting plans to force investors to cover losses in a repeat of the sovereign debt slump that started earlier this year in Greece. Her comment in a Nov. 23 speech that the euro’s condition is “exceptionally serious” helped drive the currency down 1.6 percent that day.
With EU leaders meeting in Brussels today as the region’s debt woes threaten Portugal and Spain, Merkel’s statements may raise financing costs for the euro area that she says she’s defending, said Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin. Her outbursts may also derail efforts by other EU states and the European Central Bank to fend off bondholders who are betting on a default.
“If you are in a context where Ireland, Portugal, Spain and perhaps Italy have significant difficulties, you should watch markets and be careful how you communicate,” Enderlein said.
At stake are European efforts to contain weakness in the bond markets that threatens to blow the euro region apart. The single currency dropped 6.7 percent against the dollar this year and the extra yield investors demand to hold 10-year bonds of Italy, Spain and Portugal over German equivalents rose last month to euro-era records.
Market Mover
As financial markets thrust policy makers into uncharted territory, Merkel may have overtaken ECB President Jean-Claude Trichet as “the most important market mover,” said Robin Marshall, director of fixed income at London-based Smith & Williamson Investment Management, who helps oversee about $20 billion.
“The shape of the euro zone is going be driven by Germany’s political attitude and willingness to underwrite the debt of the peripheral countries,” Marshall said. “That’s why the market is reacting so much to what she said.”
Merkel, who faces seven regional elections next year, has said her aim is to put Germany’s stamp on the euro area by getting all countries to reduce budget deficits, thus shielding German taxpayers from the cost of any future bailouts.
The leader of Europe’s biggest economy hasn’t confined her investor-roiling initiatives to bondholders. When Germany introduced on May 19 an overnight ban on naked short-selling of credit-default swaps on European government bonds, the euro tumbled to a four-year low, stock indexes from Asia to the U.S. declined and Deutsche Bank AG, Germany’s biggest bank, fell as much as 3.7 percent.
‘Destructive’ Markets
Merkel was unapologetic about failing to coordinate with her European partners on the ban, saying in a May 19 speech to parliament she had to act to curb the markets’ “destructive” potential. France joined the initiative in June and the European Commission proposed EU-wide restrictions on Sept. 15.
The chancellor’s rhetoric reflects opposition from voters and much of Germany’s political establishment to being Europe’s paymaster, said Gerd Langguth, a Merkel biographer and professor of political science at the University of Bonn. Germany accounts for 27 percent of the euro region’s gross domestic product and is the biggest contributor to the Greek and Irish bailouts.
“She feels she has to make statements that show Germans she’s got the situation under control,” Langguth said by phone. “She mistrusts banks and financial markets in the sense that she sees them as merrily going about their business and expecting that governments will be there to pick up the debts.”
Karl Marx University
Merkel, 56, who grew up under East Germany’s command economy, was 35 years old before she witnessed first-hand a market-based system with the fall of the Berlin Wall in 1989. Her academic degree is in physics from what was then called Karl Marx University in Leipzig. She also has a doctorate in quantum chemistry from the Academy of Sciences in East Berlin.
“I’m better known as a physicist than an economist,” Merkel told an audience in Berlin in March last year.
Merkel differentiates between the export-driven “real economy,” which she says got Germany through the financial crisis, and the “so-called markets” that speculate to survive. Policy makers have to assert “primacy” over the markets in “a kind of battle,” she said in a Nov. 18 speech in Berlin.
Her disinterest in pacifying investors was evident as she held out against aiding Greece. On April 28, as Greece sought a lifeline, Portuguese stocks fell, risk premiums on Italian and Irish debt approached a 10-month high and the euro dropped to a one-year low as investors speculated that Merkel would hold up the bailout.
Greece Rescue
Greek yields retreated from a record after German lower- house lawmakers backed as much as 22.4 billion euros ($30 billion) in aid for Greece on May 7.
Merkel’s hard line came too late to stop her losing a regional vote on May 9 in Germany’s most populous state, which cost her bloc its majority in the upper house. She blamed the result on the Greek rescue.
That’s a lesson she’s learned going into this week’s EU summit, Langguth said. She has knocked down proposals by Luxembourg and Italy for joint euro-area bonds that would result in Germany paying higher interest on debt and rejected Trichet’s pleas to restock the 750 billion-euro rescue fund set up in May.
Any attempt to win parliamentary approval for more resources to help the sovereign debt markets would encounter opposition from her coalition, said Frank Schaeffler, a lawmaker with Merkel’s Free Democratic Party junior coalition partner.
No Firefighting
“Bond markets are burning, but instead of putting out the blaze, Germany has chucked in the fire extinguisher,” Schaeffler said. “The crisis is over our heads and the route we’ve taken to quell it is very, very expensive and may become more so.”
Merkel was hardly quelling investor concern in October, when she persuaded French President Nicolas Sarkozy at the Normandy beach resort of Deauville to lock in the threat that bondholders will have to pay in future bailouts starting in 2013.
The deal prompted Trichet to express concern to EU leaders that the plan’s threat of debt restructuring was worsening the situation, Merkel told reporters on Oct. 29 in Brussels. She responded that political leaders “also have to keep in mind our people, who have a justified desire to see that it’s not just taxpayers who are on the hook.”
Bonds in Greece, Ireland and Portugal declined. The subsequent “panic” that culminated in the Irish bailout can be traced back to that point, said Marshall of Smith & Williamson. He held an office meeting the next Monday morning, Nov. 1, to discuss the implications of Merkel’s comments at the “game- changer” summit.
Case by Case
To be sure, Merkel doesn’t always act as tough as she talks. She aided Greece, albeit after dragging out the process, and watered down her proposal to force investors to accept losses, agreeing instead to a “case by case” basis. Her Christian Democratic bloc’s approval ratings have recovered to the level of the September 2009 election.
“The chancellor’s public comments are based on her mandate: making policy for the good of Germany and contributing with this policy to a united and strong Europe,” Steffen Seibert, Merkel’s chief spokesman, said in an e-mail.
Her case is buoyed by an economy that’s forecast to expand at the fastest pace since records for a reunified Germany began in 1992 and unemployment of 6.7 percent in October, compared with the EU average of 9.6 percent.
Germany’s benchmark DAX index rose to its highest level since May 2008 on Dec. 13. The gauge is up 18 percent this year, outperforming the 8.8 percent advance of the U.K.’s FTSE 100 Index and the 9.1 percent gain of the Stoxx Europe 600 Index.
Merkel will ultimately have to act in Europe’s interest whatever the cost, said Enderlein of the Hertie School of Governance, who is also a former ECB economist.
“They will provide stability to the euro area and guarantee euro-area debt of all sovereigns when necessary,” Enderlein said. “Germany has no other choice.”
To contact the reporter on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net
To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net
Rate this Page