Thursday, November 10, 2011

Two-track eurozone: wheels within wheels

I take my assertion in my last post about a possible Merkel capitulation back. The Reuters story about the Franco-German discussions about a eurozone breakup, or a two-speed eurozone, was ex[;psive on a day when Italian yields spiked, but a further Reuters story indicates that the "informal" discussions had been going on for a month. Moreover, the discussions were at a theoretical level and not centred on the nuts-and-bolts of how it would be done:
The change has been discussed on an "intellectual" level but had not moved to operational or technical discussions, the EU official said. A French finance ministry spokesman denied there was any project in the works to reduce the currency bloc's membership .
More interestingly were the affirmations of this highly risky approach from both Paris and Berlin.
French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe -- the euro zone moving ahead more rapidly than all 27 countries in the EU -- was the only model for the future.

Speaking in Berlin, Merkel reiterated a call for changes to be made to the EU treaty -- the laws which govern the European Union -- saying the situation was now so unpleasant that a rapid breakthrough was needed.

From Germany's point of view, altering the EU treaty would be an opportunity to reinforce euro zone integration and could potentially open a window to make the mooted changes to its make-up.

Who is trying to do what to whom?
So here is the question: If discussions had been going on for a month, why did the story break yesterday of all days, when the financial markets were in turmoil? This was probably a leak. It sounded like too orchestrated to me. It seemed to me that it was done for maximum impact.

If that was a leak, then who did it and why? I have several theories:
  1. Angela Merkel has come to the realization that only the ECB can save the euro. She had the story leaked to throw panic into the markets to pressure the German hardliners within her government and the Bundesbank. In that way, it would give her political cover to give Mario Draghi the nod to start monetizing debt.
  2. The French want the ECB to act. They had the story leaked to throw panic into the markets to pressure the German hardliners within the German government and the Bundesbank.
  3. Mario Draghi and the ECB wants Silvio Berlusconi out sooner rather than later. This was leaked to throw gasoline on the fire.
  4. Ambrose Evans-Pritchard wrote:
Veteran EU watchers say the leaks appear to be a heavy-handed attempt from certain quarters in Berlin to force austerity compliance in southern Europe.

Personally, I think that either 1 or 4 are the most likely possibilities. In typical European fashion, there seems to be a lot going on behind the scenes with different factions of the elite jockeying for position. The good thing is that the Germans are actually having a hard internal debate of what they want out of the EU and the eurozone.

So I take it back. This was not a Merkel capitulation and panic moment. But don't just watch and react to the headlines, there are wheels within wheels as pawns are maneuvered around the European chessboard.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.  


Strawberry Blonde said...

With U.S. banks down again today, it looks like there is more trouble ahead...especially if they close down again tomorrow:

John Berry said...

Just passing by after reading your interesting piece on Seeking Alpha.
Good work!
Greetings from Italy.