STOCK MARKET WATCH, Tuesday, December 13, 2011

[Demeter]

19. Wolf Richter: Germany’s Last-Ditch Compromise, At A Price

http://www.nakedcapitalism.com/2011/12/wolf-richter-germany%E2%80%99s-last-ditch-compromise-at-a-price.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

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“I’m very happy with the result,” Chancellor Angela Merkel told the cameras on Friday morning as she climbed out the limo. She talked about the start of a stability and fiscal union and didn’t want to accept any “lazy compromises.” But the vague agreement that emerged may be illegal under European Union law and may devastate weaker economies. It elevated Germany to a leadership role that other countries perceive as domineering and arrogant. It can’t be put into a treaty. And by isolating the United Kingdom, it cut a deep gash into the EU—inflicting heavy collateral damage on the well-functioning 27-country free-trade area though it was aimed at the teetering 17-member Eurozone.

At its most fundamental level, the Eurozone has a nasty flaw: it allows member economies to become addicted to the crack cocaine of deficit spending without giving them a central bank that provides unlimited amounts of money to feed the habit. The Eurozone is the only major economy that has forbidden its central bank by law to print money to buy government debt. Goal: a currency that would retain its value. The Fed’s policy of stirring up inflation and devaluing the dollar is called Inflationspolitik in German, synonymous with government deception and theft. And Germany tried to make sure that the euro wouldn’t by hijacked by it.

But deficits spiraled out of control and debt piled up and the crisis arrived. Each summit that was supposed to solve the crisis once and for all by injecting confidence into the markets was followed by loss of confidence, chaos, and … another summit. Yet the problem remains un-fixed: economies addicted to crack cocaine without a central bank to feed the habit...Markets know that. All they want is for the ECB to turn on the printing press and buy unlimited amounts of Eurozone sovereign debt. It would cause a bout of inflation (30% – 50% over ten years, as it has in the US), devalue the currency, and demolish the purchasing power of the middle class as wages wouldn’t keep up with inflation. On Thursday, the ECB has come close with its announcement that it would lend unlimited amounts of money at near-zero interest rates for up to three years … to banks. But not countries. Inflationary risks may be similar, but it doesn’t violate the treaty. A solution that left some Greeks, whose salaries and pensions had been decimated, scratching their heads.

The agreement corresponds to Merkel’s demands:

Strict limits on budget deficits

Nearly automatic sanctions imposed on violators

European Commission involvement in approving national budgets

European Court of Justice as final budget arbiter

Eurobonds struck off the list

Bailout funds … well, that debacle hasn’t changed

Involvement of the IMF (the ECB would lend the IMF €200 billion, and the IMF would then lend the money to Italy and other countries…. to circumnavigate the Lisbon Treaty).

The back door is already wide open. While each country is required to propose an essentially balanced budget, any major catastrophe or recession would allow it to run a large deficit—a matter of interpretation. No date has been set when the rules would go into effect. Maybe 2020, if Germany’s own new rules are any guide. It’s not a current fix.

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