Standard & Poor’s has issued an extraordinary credit alert on the eurozone, one that deserves close attention. It warns that the rise of Germany's AfD anti-euro party calls into question the euro bail-out machinery and queries the pitch for any form ...
Ambrose Evans-Pritchard considers the following as important: ECB, Economics, euro, Eurozone, Germany
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As the largest euro area government and the benchmark safe-haven issuer, Germany's role in the joint crisis management has been critical. The relatively strong domestic political position of the German federal government facilitated the necessary compromises. Until recently, no openly Eurosceptic party in Germany has been able to galvanise the opponents of European "bail-outs", and of German taxpayers assuming contingent financial risks. But this comfortable position now appears to have come to an end. AfD has presented a party program, appears to enjoy a disciplined leadership, and is a well-funded party appealing to conservatives more broadly, beyond its europhobe core and roots. Most political analysts agree that the ascent of AfD is unlikely to be a short-term phenomenon. It could also have repercussions beyond German politics. This shift in the partisan landscape could have implications for euro area policies by diminishing the German government's room for manoeuvre. Chancellor Angela Merkel and her conservative CDU have long benefited from the absence of a viable opposition to its right. This has allowed it to move deeply into the centre of the political spectrum. Should AfD's popularity persist in the polls, we would expect the CDU to attempt to reoccupy the political space it had previously abandoned. Accordingly, we would envisage a rising probability of the CDU's (and hence Germany's) policy stance hardening toward euro area compromises. This could include less flexibility in easing the pace of fiscal adjustment of other European sovereigns, or resistance toward a coordinated pan-European investment plan that some European governments are aiming for. It could also lead to more openly critical rhetoric against the ECB's policies, which would further complicate unconventional monetary policy. None of this would matter much, if we were to assess that the euro crisis is safely behind us. However, this is unlikely to be the case. Eurozone output is still below 2007 levels and in 2014 the weak recovery has come to a near halt in much of the euro area. Unemployment remains precariously high and disinflationary pressures have been mounting. Public debt burdens continue to rise in all large euro area countries bar Germany. We will monitor any signs of Germany hardening its stance. Such a shift could diminish the confidence of financial investors in the robustness of multilateral support upon which any eurozone sovereign could draw, should it be required. Such a change in sentiment could contribute toward less benign sovereign funding conditions for lower-rated euro area sovereigns compared to the historically low interest rates on sovereign bonds that we observe today.S&P also warned that a forthcoming judgment by the European Court on the ECB’s backstop plan for Italy and Spain (OMT) might queer the pitch yet further. The German Verfassungsgericht has already ruled that the OMT “manifestly violates” the EU Treaties and is probably “Ultra Vires”, meaning that the Bundesbank may not legally take part. The European Court can hardly ignore this if it values its own survival. (Just to clarify, the German court does not defer to the ECJ as a superior court. It reserves the sovereign right to strike down anything the EU institutions do, pointedly reminding overzealous officials that the member countries are the “Masters of the Treaties”, and not the other way round) David Marsh from the monetary forum OMFIF – and author of books on both the Bundesbank and the euro – says there cannot be any serious QE in these circumstances. “QE is just not on the table. It is a red herring,” he said. I agree entirely with S&P’s analysis, and I also note a stark divergence in market perceptions between German experts (or those who read German and follow Germany closely) and the Anglo-Saxon/global fraternity. Americans in particular seem to view the ECB as the counterpart of the Federal Reserve, responding to normal economic signals. It is nothing of the kind. The ECB is a political animal. It cannot stray far from German political consent, or at least it cannot do so safely. It is already clear that Germany will drag its feet on the ECB’s plans for private bond purchases (ABS, RMBS, covered bonds) for months. Berlin/Frankfurt will seek to ensure that it does not add up to much – at least until Germany itself gets into trouble. Bundesbank chief Jens Weidmann said this week that the ECB’s plan to buy securities shifts the risk to taxpayers from banks. It is “doubtful” whether there are enough high-quality assets available to make much difference in any case, he said. Yes, Mr Weidmann was overruled on the OMT in August 2012 but that was an entirely different episode. Germany was not overruled. The German finance ministry helped create the OMT, as the lesser evil at a moment when Italy and Spain were flying out of control. This time Berlin is closer to the Bundesbank. Finance Minister Wolfgang Schäuble has been shooting down every proposal for reflation, warning at the G20 that there are already bubbles forming in the equity and property markets. We are back to the core problem that bedevilled the eurozone through its three near-death experiences – May 2012, November 2011, and July 2012 – which is how far the German body politic is willing to go to shore up monetary union when push comes to shove. This issue has never been resolved. At each stage Germany has agreed to do just enough to keep EMU going, always at the twelfth hour, without ever going far enough to put the currency union on a workable footing (Very difficult in my view, though that won’t stop EU leaders persisting until victims take matters into their own hands). Whatever window of opportunity may have existed when Angela Merkel faced no coherent Eurosceptic opposition has now passed irreversibly. If and when the next shock hits, Prof Lucke’s AfD will standing across her path with bayonets, not pitchforks.