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Last
Wednesday in a conference call followed around the world, German Chancellor
Angela Merkel, French President Nicholas Sarkozy and Prime Minister George
Papandreou of Greece gave broad assurances that in exchange for Greek
commitment to enact further austerity measures, the flow of bailout funds
will continue from the north. Although details were scarce, and no
significant structural solutions were proposed, the symbolism was sufficient
to diffuse mounting anxieties on both sides of the Atlantic. Stock markets of
the major democracies rose strongly, while precious metals fell. But
investors are right to wonder if anything of substance actually occurred.
The press
conference was a testament to the power of showmanship. Offering no more than
a short-term palliative to a serious long term problem, it succeeded in
sweeping more dirt under the rug. The fact that the show was necessary at all
is a function of the seriousness of the EU problem. Agreement to lend Greece
more money averted sudden default and a likely banking crisis. Also, it
appeared to reduce chances of a euro collapse.
The leaders
proclaimed support for Greece, whose Prime Minister promised to grind his
country under even more austerity. Meanwhile, the Franco-German axis will
twist the arms of the remaining fourteen Eurozone nations to provide more
funding. In reality, these smaller nations are quickly being relegated to the
backseat. France and Germany will also pressure the additional ten EU member
states (which are not members of the Eurozone), to provide funding under the
auspices of the European Financial Security Mechanism (EFSM).
The activism
of Merkel and Sarkozy should come as no surprise. French and German banks are
the largest holders of Greek debt. The leaders' primary mission therefore is
to protect the interests of their own financial behemoths. As a secondary
concern, European financial interests are looking to slow the rate by which
depositors are withdrawing funds from Greek banks. There is increasing panic
that if Greece withdraws (or is expelled) from the Eurozone, euro-based
deposits in Greek banks would then become transformed into drachma-based
deposits. These of course would likely be substantially devalued.
The actions
this week bought time for the Franco-German and Greek banks until major Greek
debt rollovers in October and November. But they did not solve the massive,
underlying problems, not just in Greece, but in many other indebted nations
in the Eurozone.
Meanwhile,
U.S. Treasury Secretary Tim Geithner has arrived in Europe to dispense wisdom
as to how the Continent can handle the crisis. The puffed up Treasury
secretary seems to be regaling European finance ministers with tales of how
he managed the 2008 financial crisis from his former post as president of the
New York Federal Reserve. He is suggesting that Europe increase the size of
its current bailout funds. You can forgive European leaders who may perceive
Mr. Geithner as somewhat less than credible on this point. There is mounting
evidence that in terms of finding a solution to the sovereign debt crisis,
U.S. and EU policies are diverging.
Increasingly,
it appears that citizens of the twenty-seven nations of the EU will be liable
for the greed and imprudence of EU banks, particularly those of France and
Germany. This will be resented by voters, who have in fact shown signs of
favoring greater taxes on the financial sector. These proposals are being
resisted by the Americans. Furthermore, voters are showing increased unease
with the entire notion of a European superstate.
Northern
European voters dislike public subsidies for what they see as the spendthrift
habits of PIIGS. Meanwhile, voters within PIIGS are beginning to chafe under
the increasingly dictatorial tones of financiers and politicians who come
from outside of their own borders. IMF and ECB officials no longer arrive to
suggest ways to improve financial conditions but to issue austerity
instructions in return for funding. Local citizens resent what they view as
the calculated destruction of their economies by unaccountable outsiders.
This may be
part of the ongoing end game to a star crossed financial union. The EU is
founded on deception and lies. It was lies that enabled Greece to bypass the
conditions of Eurozone entry. Deception led to the excessive borrowing of the
PIIGS, which threatens now the solvency of the EU banks. Increasing voter
horror and resentment is a massive democratic deficit, whereby entire
countries are beginning to feel powerless in shaping their own destinies.
The market
reaction this week suggested that investors believe that the politicians are
in charge, and that they know what they are doing. It bought time. But, it
remains to be seen whether that time will do any good.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax:
949-863-7100
www.europac.net
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