Why the euro is still France and Germany’s toy

So, “Merkozy’s” plan to plan for a plan has had the desired effect – in the short term. The bear squeeze in equity markets has continued and their sick patient, the euro, has had a further remission.

The plan thus far shows little substance over form, but there is an almost palpable feel-good factor around as snippets of good news – strong US retail sales announced two Fridays ago – hit the headlines.

At the same time, consumer confidence has reached multi-year lows, propelled no doubt by the doom and gloom of a few weeks ago. Consumers are, however, a fickle bunch. They may say they are less likely to spend, but then along comes the new “iThing” from Apple and it is a case of “shiny thing make it better”.

On the agenda at the G20 meeting would have been a number of cunning plans, including a bigger writedown on Greek debt (plan A), more firepower for the European Financial Stability Facility (plan B) and yet another recapitalisation of the banking system (plan C).

The Greek hairdresser’s bill has been much discussed already by the euro elite, and 50% off the mullet looks almost certain. However, they need a way to avoid calling this most obvious of defaults a default. Otherwise those dreadful speculators who have arranged insurance on their bond holdings by bidding up the price of credit default swaps (CDS) will get off scot free.

Never mind that most of the major buyers of sovereign CDS are banks prudently controlling their risk exposure to avoid being caught up in plan C. The providers of this insurance include many of the weaker banks, trying to earn their way out of the hole they are in, knowing they will be bailed out if a default happens.

They will need bailing out anyway, so denying the Greek haircut is a default will only hurt the good guys, but then nobody likes a banker these days.

It has already been a hard road to get all eurozone governments to sign off for the initial funding for the EFSF (Slovakia being arm wrestled into a corner at the last moment) and it would take a change of the EU constitution to allow any gearing up or money printing a la Federal Reserve, by the ECB. This would probably take far longer to approve (if ever) than the markets have the patience for.

Plan C will happen; with or without the other two. Dexia, the Franco-Belgian bank, has set the ball rolling.

Its Belgian operations have been bought by their government for €4bn and, along with France and Luxembourg, are giving state guarantees for up to €90bn to secure borrowing for the next ten years. This, of course, is a nationalisation, not a recapitalisation and it will not be the last.

The amounts involved with Dexia are petty cash in the great scheme of things, but it is indicative that each EU country will be pressured to look after its own banks, if it can, and don’t expect Germany to come to the rescue.

It is all very reminiscent of the machinations of the flawed Exchange Rate Mechanism (ERM), the precursor to the euro. The whole euro project was, and still is, a battle between France and Germany for control of European monetary policy.
Nothing has changed.

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