2012/02/08

On Merkozy's power, fools and power in general

.
Last year, some observers hailed a close Franco-Anglo cooperation and diagnosed the end of the Franco-German couple which had exercised above proportional influence in Europe.

These politics games are simple; a few (two) large powers agree on common ground on a topic, then they go to a target summit and prevail with their proposals and demands because there's not going to be any agreement without them anyway. The advantage for the two is basically that the special interests of many others are on a much weaker bargaining position.

Well, the British-French cooperation in military affairs is largely irrelevant now since the elephant in the room is the Euro currency area / PIIGS fiscal crisis. The UK is not part of the common currency and thus irrelevant; Cameron was not happy to be informed about this directly. The UK is a stakeholder, not a shareholder - and thus largely powerless in the issue.


Now there' much being written about 'Merkozy' and how they define the political reaction to the crisis. Authors ascribe especially great power to Merkel, often with reference to the German economic position.

Judging by the conventional view of great power games and by the view assumed by many journalists, Germany is now powerful.

Hmm, right.
Now what's the benefit of being powerful?


You know, Germans have become accustomed to expect that whenever they're being called 'important' or 'indispensable', it's actually about their money. It's thus not surprising that there's not exactly great cheering about this 'power' in Germany.


Moreover, the whole anecdote exemplifies how power is not advantageous under all circumstances; the political reaction to the crisis is actually a rather primitive, and not really self-serving reaction. German foreign policy uses the crisis to shove some long-term improvements down the throats of Greece, and to influence the long-term outcome (at the cost of being called out for disastrous short-term effects).

There's a huge price, though; we're being played like a violin by the financial sector. We're the dog who gets wagged by his tail. So much about our 'power'.
Said 'power' or 'greatness' is rather 'size' - a common misunderstanding in many other cases of 'power' or 'greatness'  as well.

What's really happening is that investors in the financial markets bought PIIGS public bonds and were promised a risk premium (higher than about 2% interest rate). In many cases, said investors were incompetent and did not understand that the risk premium was way too small. Well, their problem; but now they've got the additional problem that the risk might realize and they might indeed not get their money back.

This was when a lucky set of circumstances created the terrible urge "to do something" about the crisis, for, you know, people dislike change. The idea of supporting the countries in peril was born, and much fear about 'contagion' was spread.
As a result, said dumb investors were able to transfer much of their risks to European governments (the people of Europe); they socialised risk. Nobody's talking about socialising profit, of course.

Merkozy were caught in this vicious circle; the more they support Greece, the more previous commitments are at stake. The sunk costs theory says this must not play a role, but they're politicians and the only cost that really counts to them is the loss of their office.
Now they're adding one 'helping' measure after another and dig the hole deeper and deeper, delaying the collapse as much as they could (or at least till after their re-elections?). This means of course that more and more risk is being socialised.


Now where exactly is the benefit of being 'powerful'?
It certainly doesn't appear to be of much use if you're a fool.

Accordingly, getting rid of foolish policy should attract much more attention, and only once this has succeeded anyone should care much about the difficult-to-define 'power' of a nation.


S Ortmann

P.S.: I've irritated people for years by reminding them that Luxembourg is a great place, and utterly small and powerless at the same time. It's an incompatible fact to many people's view of the world.
.

5 comments:

  1. Ah yes, the powerful dog is waved by the tale. Always an amusing thing to watch from the outside. The US has spent 50 years with this kind of thing and now we are graciously and slowly washing our hands of Europe and are moving on. It's the way of the world and I have no good answers for you since power seems to bring out the most noble (and financially ruinous)impulses in all politicians. Citizens begin to see their country's power in terms of "doing the right thing" etc. Germany has entered a game which they can't win and I'd like to think that you'd learn from the US example (which I use because it's recent and ongoing, but hardly unique), but history seems to point to a different fate. Not only will you not learn, you'll make it worse, as the US continually does. As a guy who was standing around during Europe's amusingly pathetic performance in the Balkans I have some very clear memories. To this day I'll never forget the smile being wiped off my face when the neophyte Clinton administration decided to solve the problem. The formerly peace loving Democrats are suddenly upset that the military doesn't want to bomb the F#$% out of the Serbs. This past summer I saw the "Halfbright" look (Named after Madeliene Albright) on Merkel's face. She knew beyond the shadow of a doubt that Germany was powerful and she was running Germany. She just recently F#@&ed the Serbs good, mainly because she could, and insured the election of "nationalist" elements in Serbia in March. Of course there's no force being contemplated in German power games... at least not yet. But it will come. No one seems to learn. And I'd also add that Luxemburg is at the mercy of German whim. I'd much rather be a Switzerland or Sweden.

    ReplyDelete
  2. Nicely stated analysis of the situation, Sven. The only thing I can add is that the cookie has to crumble at some point. They can't just keep throwing large and increasing amounts of money at the PIIGS forever.

    But the key questions are:
    1. When will they finally stop trying to do the impossible
    2. What will happen after that

    ReplyDelete
  3. Yaaay Luxembourg!
    (to say I appreciate this fine article - no irritation at all)

    ReplyDelete
  4. If I may, Germany is played like a violin by the financial circles for a reason: Accumulated trade surpluses. There is anything wrong with accumulated surpluses, and I would congratulate Germany for doing so.

    On the other hand there are elements of a zero sum game. Germany's surplus is Greece's, Italy's, Spain's deficit. Nothing wrong with that, per se.

    It gets wrong when the market lacks correcting mechanisms. For example, the fiscal crisis in Greece is brewing since 2001. We were allowed into a club with artificially low, and centrally planned interest rates (and a nice hard currency). We borrowed, and consumed more and more imported products (most from N. Europe). Our fault of course. Right?

    Yes, but not quite! Central banks are supposed to monitor and prevent bubbles. Lacking an automatic interest rate mechanism, AND a currency adjustment mechanism, the ECB or Mr. Papademos, then Greek Central banker, subsequently with the ECB, currently PM, fully allowed and tolerated the bubble. Oversight? I don't think so.

    Between 1999 and 2004 Greece went in a rampage of infrastructure work AND defence spending. While local greed is clearly a factor, "European" pressure was also intense. Polticians were bribed to buy HDW submarines, promote Olympic games, complete (German built) airports when fiscal prudence would dictate otherwise, install (German built) trains to nowhere, (French) bridges between unpopulated areas, and consume the largest amount of Porsche Cayenne's in a "european" city. Is it Germany's fault? No, BUT laws were passed to effectively make Porsche cars tax advantaged! Money laundering.

    And it gets worse. The EU has rules and regulations. Everyone of them has a little built in bias resulting in my original point: Trade surplusses in the North, deficits and debts in the South.

    Is Germany responsible for Greece's corrupt polticians? Not at first glance. BUT, not surprising, all media are controlled by businesses that have been the main local beneficiaries of the bubble and partners to German exporters. The local German chamber of Commerce has actively promoted such partnerships, as it should, and the polticians fostering the trade imbalance with borrowed money, while the Central Bank has been organizing forums on Climate Change!

    I go back to the total lack of self correcting market mechanisms. Interest rates and fx rates. The accumulated wealth in Germany has itself, now, elements of the bubble. And what is the response? Seizure of assets and more fiscal transfers. Hold the horses! Caveat emptor! Germany and France bribed, forced, and cajoled their way into selling trinkets on credit, and now they want the real estate to make up, so that THEIR markets won't burst the bubble. This is perceived as a hostile move over here, and is NOT enough, from a money point of view to prevent the bubble collapse. Enter ECB's LTRO, but this is another chapter.

    I know this may not be a popular analysis where you come from, but it is 100% true, and supported by published deficit and surplus numbers, German court findings re corruption plays, and EU regulations are promoting the exact same financial and trade bubble in the form of Green policies. We have to import German pv panels to have electricity at €400/MWhr rather than at €40/MWhr because some (German) environmental weirdos say so, and (German) EU energy commissioner dictates so.

    Porsche may confiscate its Cayennes, Siemens its gadgets, the French their bridge, and Hochtief its airport. What do I get instead? A velvet coup d' etat imposing a non elected Government which has one and only one theme: stay with "Europe".

    Pray that the German parliament TURNS DOWN Germany's participation in the bailout. Please get rid of us lazy Greeks. Please, save German taxpayers. Please, no more trinkets, no more engineered solutions. No more Europe.

    The word Freedom still has a certain magic to it.

    ReplyDelete
  5. Well Said, Archaeopteryx. For five decades the US has tried hard to undo what we did to our South American and Caribbean neighbors. We created instability in these countries because we could finance our own operations there and loan less than optimum governments dollars to keep them afloat. After our financial interests had foolishly destroyed these economies, which started to destroy their investments, we protected these corporations/financial entities from their own stupidity by further asset seizure in the form of the IMF. When the IMF comes to town you are about to be robbed blind. I don't know if it ever happened but in the first round of bailouts Germany was trying to get the rights to Adriatic natural gas, which the EU, or let's be honest, GERMANY, had kept Greece from exploiting. We can make an easy guess that Germany will have less problems exploiting these fields now that they own them. And then Germany is indignant that the Greek citizens might want a say in this and insist that no elections be held and only the corrupt and well bought German political appointees decide things. I don't think this ends well.

    ReplyDelete

Use a nickname and stick to it! I may block anonymous comments. Offensive comments may also be blocked, in part due to the duties of a blogger in Germany.