U.S. irritation with Europe’s inability to solve the euro crisis is likely to come increasingly to the fore after Barack Obama’s re-election. The U.S. president’s relatively compelling victory will have three effects on the further development of economic and monetary union (EMU), none of them positive.
First, after months in which Obama and his team have made clear that they want Greece to stay in the euro to prevent a damaging pre-election financial collapse, the re-elected president will now have a much freer hand to say what he thinks about Europe’s euro irresolution. If Obama decides to take the gloves off with the Old Continent, this could lead to some wounding exchanges, particularly with Berlin.
Obama will probably side more overtly with France and Italy to rail against alleged German intransigence on helping Greece and other problem-hit countries — which will not go down well with Chancellor Angela Merkel.
Significantly, the most resounding approval in Europe for Obama’s win came from France’s president François Hollande, who sees the U.S. as an ally in his anti-austerity campaign against Germany.
Second, now that the election is out of the way, greater optimism about U.S. economic growth may start to take hold internationally — depending, of course, whether the so-far-intractable issue of the U.S. fiscal cliff can be resolved.
This coincides with steadily worsening economic news from Europe. The gap between U.S. and euro-area growth could widen next year to nearly 3 percentage points, the largest since the euro began. This could have an effect on weakening the euro — good news for the deficit-hit states of southern Europe, but bad for resolve and morale in Germany and the other creditor countries of Europe that are being called upon to shoulder larger parts of the financial burdens facing the south.
Third, despite the pressure points, German unwillingness to agree on more generous action over Greece, Spain and the others is likely to increase, not diminish, as the timetable moves into gear for next year’s German federal elections.
A strong reason why the European Central Bank’s much-trumped bond-buying plans are on hold is because the Bundesbank’s negative views on the matter have already been well-circulated in political circles and in the marketplace. The “phoney war” on the ECB’s so-called outright monetary transactions program could continue until the New Year. In fact, in terms of the impact on Spanish and Italian bond yields, we may have already seen the best of the impact of the OMT program.
As the French 18th century philosopher Voltaire once quipped about the Holy Roman Empire — “neither holy, nor Roman, nor an empire” — future historians may say that the OMT was nether outright, nor monetary nor a transaction.
It is certainly taking a long time to get going. This reflects the eye-watering contradictions of the conditionality that requires the Spanish government, the most badly hit contender for funds, to approach Europe for a further bailout deal without being able to tell parliamentarians what it will get in return.
The Bundesbank’s conditions for a successful OMT are the same as it habitually applied to foreign exchange market intervention in the past. Action should be powerful, coordinated and in line with fundamental market trends. In the case of the OMT, it is unclear whether these three preconditions are in place.
The problem with the OMT is that, once started, it will be very difficult to stop. The longer the delay in implementing it, the greater will be the resolve of its opponents. And the larger will be the reluctance to break the seals on a Pandora’s box that, once opened, can be closed only with the greatest difficulty.
All this is compounded by further euro-area brinkmanship on Greece after international lenders failed to bridge differences on how to reduce Athens’ still-disastrous debt levels, bringing the country close to defaulting on a €5 billion debt payment due at the end of this week.
Only nine months ago, Greece benefited from by far the greatest sovereign debt restructuring in history. Yet it is further away than ever in solving its debt problems, since austerity — as many people predicted — has simply made the debt problem worse.
Don’t forget: this calamitous outcome occurred under the aegis of the International Monetary Fund. The combination of circumstances makes the IMF much less likely to get involved in further bailout packages, whether for Greece or other struggling states like Spain.
In his new steely post-election mood, Obama will join with leading emerging market economies such as Brazil, China and India in declaring that Europe must sort out its mess by itself — which can only mean more money from the Germans.
Let’s see how this plays in Main Streets all over Germany as Merkel prepares for her own election in less than a year.