Europe Throws a Hail Mary Pass
By: John Mauldin
Monday, 17 May 2010
It’s More Than Just Government Debt
The Grand Misallocation
New York, LA, and Italy
In a 1975 playoff game, the Dallas Cowboys were nearly out of time and facing elimination from the playoffs, down 14-10 against a very good Minnesota Vikings team. The Cowboys future Hall of Fame quarterback Roger Staubach had no very good options. He later said he dropped back to pass, closed his eyes and, as a good Catholic, said a Hail Mary and threw the ball as far as he could. Wide receiver Drew Pearson had to come back for the ball and, in a very controversial play, managed to catch the ball on his hip and stumble into the end zone. Angry Vikings fans threw trash onto the field, and one threw a whiskey bottle that knocked a referee out. After that play, all last-minute desperation passes became known as Hail Mary passes. (That was a very thrilling game to watch!)
And that is what Europe did last weekend. They threw a Hail Mary pass in an attempt to avoid the loss of the eurozone. Jean-Claude Trichet blinked. Merkel capitulated. Today we consider what the consequences of this new European-styled TARP will be for Europe and the world. We do live in interesting times.
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Europe Throws a Hail Mary Pass
On Thursday of last week Jean-Claude Trichet, president of the European Central Bank, said three times “Non! Non! Non!” when asked in a press conference if the ECB would consider buying Greek bonds. His exclamation was accompanied by a forceful lecture on the need for eurozone countries to get their fiscal houses in order, some of which I quoted in last week’s letter. Trichet was remonstrating about the need for the ECB to remain independent, and was rather definite about it.
Then on Sunday he said, in effect, “Mais oui! Bring me your Greek bonds and we will buy them.” What happened in just three days?
Basically, the leaders of Europe marched to the edge of the abyss, looked over, decided it was a long way down, and did an about-face. It was no small move, as they shoved almost $1 trillion onto the table in an “all-in” bet.
Bailing out Greece is very unpopular in Germany. So why did Chancellor Merkel agree to do so? This is the story that has come out in the last few days.
“French President Nicolas Sarkozy threatened to pull out of the euro unless German Chancellor Angela Merkel agreed to back the European Union bailout plan at a summit last week in Brussels, El Pais newspaper said.
“According to El Pais, which didn’t say how it obtained the information, Spanish Prime Minister Jose Luis Rodriguez Zapatero said (in a private meeting of his Socialist politicians) that Sarkozy demanded ‘the commitment of everyone, that everyone should help Greece, everyone according to their means, or France would reconsider the situation of the euro.’
“Sarkozy banged his fist on the table and threatened to quit the euro, which forced Merkel to cave in, Zapatero told the Spanish politicians, according to the El Pais account.
” ‘If at this point, given how it’s falling, Europe isn’t capable of making a united response, then there is no point to the euro,’ the newspaper quoted the French President as saying.
“It wouldn’t be the first time Sarkozy linked the fate of the euro to a willingness to support Greece. On March 7, before meeting Greek Prime Minister George Papandreou in Paris, Sarkozy said: ‘If we created the euro, we cannot let a country in the eurozone fall. Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.” (Bloomberg)
I find this interesting when I compare it to the analysis from my friends at Stratfor:
“Germany now senses the opportunity to reform the eurozone so that similar crises do not happen again. For starters, this will likely mean entrenching the European Central Bank’s ability to intervene in government debt as a long-term solution to Europe’s mounting fiscal problems. It will also mean establishing German-designed European institutions capable of monitoring national budgets and punishing profligate spenders in the future. Whether these institutions will work in the long term – or fail as attempts to enforce Europe’s rules on deficit levels and government debt have in the past – remains to be seen. But from Germany’s perspective, they must.”
Well, at least France and Germany are not looking at each other over the Maginot Line. But it is the age old-struggle: who will lead?
There are so many implications of this latest action, it is hard to know where to begin.
“What is the plan? First, European governments have committed e500bn (e440bn in loan guarantees to eurozone members in difficulties, and a e60bn increase in a balance of payments facility). Second, the International Monetary Fund will, it appears, put up an additional e250bn ($320bn, f215bn). Third, the European Central Bank has, to the chagrin of Axel Weber, president of the Bundesbank, decided to purchase the bonds of members under attack. Finally, the US Federal Reserve has reopened swap lines, to provide foreign banks with access to dollar funding. This is a panic-driven response to market panic. It reminds us of the autumn of 2008.” (Martin Wolf,
Above all, this is a move to buy time. There is enough in this fund to purchase all the expected debt of Greece, Portugal, and Spain for three years. The money could actually last a lot longer, as Spain might not need to tap the fund for some time.
There were clearly some other quid pro quos that came out of this weekend. Both Spain and Portugal announced new austerity moves, which will help them get back below the 3% deficit limit mandated by the Maastricht Treaty within (they hope) a few years. It was the usual combination of tax increases, some budget cuts, and across-the-board pay cuts for government workers. These are very left-wing socialist governments, and their announcements were not popular with their followers or the unions. But they are enacting these cuts before a durable recovery has come about. They are committing themselves to a very rough road.