Europe disappoints again

I feel like a weather vane – last week I thought and wrote that the Merkel-Sarkozy compact looked like it was a game changer in terms of the outlook for Europe and the handling of this crisis. We then had the ECB get out the USD cheque book and start lending to embattled bank and I thought yep we’re on the right track. I even thought that the fact that US Treasury Secretary Tim Geithner was going to the EU Finance Minister’s confab over the weekend showed they were prepared to make some changes in approach and take so outside help.

But alas this morning I feel like we are further from a non-default Greek resolution than we were last week. Now I guess I wouldn’t be alone in having held out high hopes for the weekend meeting of EU Finance Ministers that was held but I would also say that I’m probably not alone in being disappointed in the outcome of same.

It seems that US Treasury Secretary Tim Geithner may have made a tactical mistake in appearing at the meeting in Poland as it seems to have rather put some noses out of joint. For example the Austrian Finance Minister is quoted as saying

I found it peculiar that even though the Americans have significantly worse fundamental data than the Eurozone, that they tell us what we should do

I could write a whole piece on what this comment alone tells us behaviourally but suffice to say it hardly focuses on the issue at hand, which is of course the proximity of Greek default and the survival of the EU in its current form.

Source: Economist

As I said above I genuinely thought that the bold action of the ECB in lending dollars to European banks last week coupled with the apparent resolve from German Chancellor Merkel and French President Sarkozy after their hook up with the Greek PM last week.

But it seems that if little old Belgium 15 months after its election still can’t form a government then how can I expect the broader EU with its different nationalities and views to be able to pull together. I guess I put stock on the ability of the crisis to draw the Finance Ministers together – time will tell but perhaps I was wrong.

For markets it is the distance between the Central Bankers and the politicians that seems to highlight the lack of a way forward. Tim Geithner is quoted in the FT this morning as saying

What is very damaging [in Europe] from the outside is not the divisiveness about the broader debate, about strategy, but about the ongoing conflict between governments and the central bank, and you need to work together to do what is essential to the resolution of any crisis

UK Chancellor Osborne echoed these comments saying

people know that time is running out, that the eurozone needs to show it can get a grip on the situation.

But do they? I saw in the Australian newspaper this morning that Merkel’s coalition partners have taken another drubbing in Berlin elections and German Finance Minister Schauble is certainly talking Teutonic tough about the Greek need to satisfy the “Troika” of EC, ECB and IMF before the next tranche is to be paid. Equally he said (according to  Wall Street Journal) that,

Membership in a monetary union is an opportunity, but also a heavy burden. Measures for alignment are very difficult. The Greeks must decide whether they want to bear this burden

But he did hold out a Tim Geithner inspired olive branch when he said  that there is real support for the EFSF in the German parliament,

There is so clearly a majority in parliament backing a broader EFSF that the vote will be completely unexciting. However the few colleagues who have difficulty with it are getting undue attention in the media

Hopes weren’t exactly dashed over the weekend but they certainly weren’t enhanced – another week of turmoil beckons.  The AUD is already under pressure but still holding around 1.03 for the moment, Dow futures are off 130 points or 1.14% and 3 year swap rates in Australia are down again trading at 4.13%. I remain hopeful that commonsense will ultimately prevail and this is just part of the cycle of basing for Greece and Europe but we’ll just have to wait and see.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

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