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How Can Britain Retain The Confidence Of The Bond Markets And Avoid The Worst Of The Euro Collapse?by John de Roe21 November 2011 It is now so obvious that the most powerful political force in the world today is neither the United States, the EU or China. It is the bond markets. We should all be appalled by the arbitrary way democratically-elected governments in Greece and Italy have been replaced by unelected, federalist bureaucrat (and have you noticed how these pen pushers and bean counters have suddenly become "technocrats" in media reporting?) at the diktat of the committee of faceless men who really run the EU, the ECB and the IMF. Taking it a step further, to imagine that real power in the Eurozone lies with these three supranational institutions is naive and wide eyed. Rather, those three bodies are just doing what they hope will satisfy the bond markets and keep bond traders buying up the sovereign debt of nations already way past bankruptcy. Papandreou and Berlusconi, charlatan and clown though they may respectively be, are just lambs that the Frankfurt Group has slaughtered in the vain hope that the gods of international finance will be placated and smile on those who have embarked on the venture of using financial crisis to force greater financial and political integration on the nations of Europe as a step towards the creation of a single European nation under the dead hand of which ancient languages and cultures will be into a single homogenous identity. Seventy or more years ago John Steinbeck talked of the beast that must grow or else die. The bond market is the hungry mouth of that beast and it is testimony to just how ravenous and insatiable the beast is that the sacrifice of those two national leaders has barely registered on trading conditions. Greece's debt continues to have junk bond status, Italy's is racing towards a similar fate. The conventional view in the economic and academic community holds that the fate of the Euro and, by extension, the European integration project, lies with Germany. In reality that means Germany now must alone decide whether to authorise the ECB to purchase the debts of the Eurozone countries that the bond market has lost confidence in or is about to lose confidence in. In other words, Germany can only save the Euro by doing the bidding of the bond market. And the bond market is growing impatient. Wolfgang Schauble, the German finance secretary may make threatening noises about Britain becoming isolated outside the single currency but really it is Germany that stands isolated. Austria and The Netherlands may be solvent, largish economies but they have stood aside from the Roman Circus that is international finance. In Britain, the fate of almost every senior politician in the three main parties depends upon whether he or she can find favour with this leviathan. Labour's leader Ed Miliband and money man Ed Balls have been more or less written off on the grounds that the bond market would react unfavourably to their electoral success. The Liberal Democrat money man Vince Cable has been discredited because of his vacillations about austerity measures. The stock of David Cameron and George Osborne, by contrast, is still relatively high because their presence as Prime Minister and Chancellor of the Exchequer is seen as the main reason why the bond market hasn't yet lost confidence in Britain's ability to pay its debts. You can bet your bottom dollar that if the bond market changed its mind about Britain, the Coalition would collapse within a matter of days, just as the bond market has swept aside the governments of Ireland, Greece, Portugal, Italy and Spain. Just as an aside, it now seems inevitable that its merciless guillotine will soon fall upon the head of Barack Obama's new best friend Nicolas (Gnome) Sarkozy. This is the context in which the pseudo war currently being fought out between Britain, France and Germany must be placed. Sarkozy's strategy of persuading Germany to fall in with his plan for a two-speed Europe, leaving the non-Eurozone members of the EU out in the cold, is already floundering on the rocks because the discrepancy between France's 10-year bond yields and Germany's 10-year bond yields – the spread – is now the metric by which the relative power of the two countries is measured. The spread is currently the highest it's been since the Euro was created, thus France is now the weakest it's been relative to Germany since 1999. France now has to pay more than twice as much as Germany to borrow for 10 years, which, to all intents and purposes, means France's economy is less than half as powerful as Germany. It really doesn't matter what Nicholas Sarkozy wants Angela Merkel to do and it will matter even less in the coming weeks as France's 10-year bond yields continue to climb. France will shortly be dependent on the ECB to purchase its debts and, like all the other insolvent Eurozone countries, will be at the mercy of Germany. If Angela Merkel wants to save the Euro she will eventually have to capitulate to pressure from the bond traders. Unless she and Herr Schauble can find a way to disguise this they will face the wrath of German's weary taxpayers who feel they have been supporting the basket caes bankrupted by the single currency project for far too long. With each day that passes the situation worsens and some form of quantitative easing (printing money), financed by Germany, looks inevitable. The question that nobody has addressed yet is, what price will Germany be able to extract from the 27 EU member states in return? The German's are not interested in a two-speed Europe. She wants what German leaders have always wanted, namely, an entire continent dominated by Germany. So she's aiming for a renegotiated EU treaty in which all 27 member states transfer the lion's share of their remaining powers to various supranational EU institutions. The completion of the European project, in other words, with Germany pulling the strings from the centre. The problem with this is it would require massive changes to the treaty under which relationships between member states are established, including a massive transfer of sovereign powers from the elected representatives in national assemblies to the unelected bureaucrats of Brussels and Luxembourg; in effect a European Constitution. And while political leaders and bureaucrats get a little thrill at the mere thought of this, it is deeply unpopular with the voters of member nations. For any national leaders, including Frau Merkel, to try to push it through without a referendum would be electoral (and possibly literal) suicide. And yet, in referenda on a previous attempt at financial and political integration, the voters of France and The Netherlands rejected the proposal which was then abandoned as such changes have to be ratified by all member nations. Persuading the other 16 member of the Euro single currency scheme to meekly fall in with what Germany tells them to do will be easy, after all most will be dependent on Germany's financing their debt and the few solvent countries will be influenced by Germany's importance to them as a trading partner.. It will not be so easy to persuade single currency refusnik nations to cave in to German control of their finances and foreign policy. This does not apply only to Britain because of historical suspicions (in fact Sweden and Denmark have even more reason to resist greater German influence which was a big factor in their staying outside the Eurozone while Britain's reasons were more pragmatic) Thus the only part of the Sarkozy plan the Germans were keen on was the clause that demanded all the Eurozone nations vote as a bloc on any proposed changes to the way Europe is run. Our strategy, as set out by David Cameron, will be to limit the United States of Europe to the 17 member states of the Eurozone (and any of the periphery countries that want to join) and only ratify a renegotiated treaty on condition that various sovereign powers that Britain has given up are repatriated to the United Kingdom. (No doubt some of the other nine non-Eurozone members countries, such as Sweden and Denmark, will want the same thing.) This is where the political power bond market comes in. If Britain wants to face Germany as an equal rather than a supplicant in the treaty renegotiation that must surely come, it is essential that yields on UK bonds remain low. After all, if the UK's 10-year bond yields are rising or, worse, have passed the all-important seven per cent mark before the negotiation is concluded, Cameron will be at Merkel's mercy. In that case, Britain would effectively be insolvent and as dependent on Germany for the revival of its economic fortunes as France, Italy, Spain, Greece, Portugal, Ireland, Austria, Belgium, et al. Now, it's a safe bet that Angela Merkel believes the bond market will eventually lose confidence in Britain. Consequently, her game plan must be to delay the point at which treaty renegotiations begin in earnest for as long as possible. It's also a fairly safe bet that David Cameron shares his German counterpart's long-term prognosis of Britain's economic fortunes in the absence of the Euro crisis being resolved. Ergo, his strategy must be to push for renegotiation before the bond market turns. So far, things seem to be going Britain's way ( I say that because most of us would rather get leprosy than be part of Greater Germany). The bond markets have more or less lost confidence in the largest economies in the Eurozone (with the exception of Germany), whereas Britain's gilt yields are at an all-time low. This presents a window of opportunity. The government's hope must be that the crunch point for Germany arrives before the bond market loses faith in Britain. RELATED POSTS: The Greek Bail Out Deal Humiliates Greece Without Solving Anything A "strictly confidential" 10-page debt sustainability report commissioned for yesterday's meeting of eurozone ministers has been leaked to the media. The document concludes that the austerity measures being foisted on Greece in order that the indebted country can receive a €130bn bailout, are quite likely to prove self-defeating, in that the austerity, by further weakening the economy are likely to cause the sovereign debt to ...
Sacrificing the future to save the Euro
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