Let's make a very simple and brief emergency analysis of what happened in the markets and within the ECB last Thursday and Friday. As you have all seen, in unison with rumours of a Greek default, the Euro plummeted almost 3% to 1.3650 in less than 48 hours and almost 6% in 10 days. All indicators of Greek default risk were stressed, breaking all-time records. Risk premiums spread, of course, to the rest of the European periphery. Germany leaked the readiness of its bank rescue plan in the face of the imminent Greek default. And markets plunged another 4% across the board, spreading to Wall Street. Meanwhile, politicians continue to juggle grenades, and it seems that the only one lucid enough to realise the impending danger is Mr. Market.
Significantly, Trichet's anger at the last press conference, when fed up with German critics, he reminded them that inflation in Germany has been at optimal levels (1.5%) for longer than in the last 60 years. That is a clear allusion to the pampering of the German economy with which Trichet believes he has steered the ECB ship. And he showed his disappointment at how little recognition he has received from German public and economic opinion. Perhaps the ECB president will now realise the gulf that is beginning to separate Germany from the colombofilia that reigns in the European periphery.
None other than the ECB's Chief Economist, Jürgen Stark, resigned outright due to his disagreement (officially for personal reasons) with the ECB's policy of buying Italian and Spanish bonds. A full-fledged hawk who has no longer accepted to go down the tube of the free bar for the European periphery. Let's remember that another hawk, former Bundesbank president Axel Weber, resigned from the ECB presidency when everyone took his appointment for granted, due to his opposition to the political guidelines set by Trichet, Merkel, Sarkozy and other financial doves and euro-bureaucrats.
Some eminent voices exclaim that it was time for Stark to step down and let the «right decisions» take place, such as Nouriel Roubini himself. And it is true that the dovish policy seems to be carrying out a slow, painful and uncertain cleansing of orthodox hawks. But beware, because this ethnic cleansing has its double reading and indecipherable consequences. Merkel is losing her convincing power in the German parliament by leaps and bounds (just this week she lost the confidence of voters in her own homeland). And Stark's resignation is likely to further foster euroscepticism among Germany's elite of economists and specialists, adding to the increasingly widespread and growing sense of despoilment among German citizens.
Therefore, what a priori seems to be good news for the definitive union of the European treasury and the Germanisation of peripheral debts, is logically bad news that directly affects Germany's pocket, credibility and solvency. And the elimination of hawks defending German interests, and their replacement by doves defending peripheral interests, has two dangerous and antagonistic aspects: Paving the way towards full fiscal, labour and treasury union; or else Germany's exit from the Eurozone and the full recovery of the functions of its Central Bank and longed-for DM. Because the doves seem to have ignored the possibility of releasing peripheral ballast to please the hawks and thus create a two-speed Eurozone (with two currencies, two treasuries and two of everything).
If we drift towards the former, the future will be peaceful for some and impoverished for others. But if we are drawn into the second, the consequences could be much more unpredictable, due to the instability that would be generated in the markets at the global level.
Today we have one less hawk at the ECB and therefore a smoother path for the peripherals. But let's not fool ourselves, at the same time there are also more Eurosceptics in Germany, and this is pushing it dangerously farther away from the Eurozone. With a government that economic illiterates, If we do, it will be impossible for us to find the formula and the pulse needed to work out the right mix in the midst of the perfect storm. Or maybe we should start thinking for once and for all about a future without Mama Germany covering our shame.
For the time being, if Greece's default is not confirmed this coming week, the kick to follow will probably take us until 19 December, when another €1.2Bn of Greek bonds are due. Until then there are only small short maturities that are likely to roll with the primary dealers. Perhaps the temporary clearing of hawks will allow the Greeks and Germans to eat their nougat while still sharing the single currency and surrounded by pigeons. But as we said in the article «Hawks or pigeons«We are in a perverse Matrix which prevents us from starting on the painful road to recovery on which some birds of prey are already well advanced.
The Eurozone's drift is probably the most destabilising event in the global economy since World War II.