So the leaders of France and Germany met. They ruled out in advance giving the markets what they said they wanted. There is to be no borrowing by Greece or Portugal, Italy or Spain, on a common credit card with Germany standing in as guarantor. I can understand the German reluctance.
Meanwhile, behind the scenes, the officials have to move closer to such an outcome. The failure of governments to implement the July package before they all went on holiday left the markets unappeased. Bond traders took it out on Spanish and Italian bonds. The European Central Bank stepped into the breach, and bought up £20 billion of Euro sovereign bonds last week. They managed to get the borrowing costs of Spain and Italy down by 1%, from 6% to 5%.
This is a backdoor way of harnessing German credit worthiness to help the others. Germany is the largest shareholder in the European Central Bank, which is now flexing its version of the joint Euro credit card to buy in these bonds. This subsidises the borrowing costs of the weaker countries. The European Central Bank has promised not to print the money to do the buying – we will see. If it does not print the money then it has to borrow it.
The average credit rating of the zone is stronger than the credit rating of the individual weak countries whose bonds the Bank is buying. This route can only lead to success and happiness if the weak countries are transformed and get their own credit rating back up to the average of the zone or better. If this does not happen, then the ECB is prone to incur losses and the credit status of the whole zone is likely to reduce.
The President and the Chancellor mainly discussed how they can exert more control over the budgets of the wayward sovereigns. The problem is finding politicians and officials in any of these countries willing and able to cut deficits. France and Italy have now announced additional deficit reduction programmes to march alongside the programmes for Portugal, Greece and Ireland put in by the IMF and EU. Spain also has one in place.
The announcement that German growth slowed to 0.1% in the second quarter, hard on the heels of the news that France did not grow at all in that three months,is a further strong headwind against deficit reduction. Euroland remains unable to make up its mind whether to press on with the type of fiscal union and single country government that could rescue the currency, or whether to expel the members that are the farthest away from meeting the requirements and average standards of the zone as a whole. The middle way they are trying remains the muddled way which just leads them from one crisis to another.
Mrs Merkel had to refuse to allow the issue of open above board Euro area bonds, each stamped with a German guarantee, giving the weaker members access to cheaper credit. Instead it will have to be done by the back doors of the EFSF and the ECB. The results of the talks was no answer. There are three possible answers.
1. The miracle occurs, and the weak countries convince markets they have got on top of their debts and deficits so they don’t need any more subsidised loans.
2. The weaker members leave the Euro
3. The stronger states allow the weaker ones to borrow more at a subsidised rate, whether this is done through a beefed up fund to transfer cash, or through hugely expanded government bond buying by the ECB, or by the issue of Euro bonds.
Meanwhile, slower growth for the whole area is bad news. It means the stronger members don’t have so much financial or political leeway anymore to help the weaker ones. What a mess.
What the UK government needs to do immediately is to rule out imposing a Tobin tax on the City. As the UK wants nothing to do with the Eurozone, it should not be expected to raise a tax to pay for its failings. If the Eurozone needs extra taxes to pay for all the excess public spending, then the obvious choice would be a tax on motor car and wine production, something Germany and France do a lot of, not on financial services, something the Uk does more of.