Playing poker with the euro

Governments and markets are playing a dangerous game of poker – to the death. At stake is nothing short of the euro itself, which, under fire from ruthless speculators, is liable to collapse amid the ruins of the Parthenon. And there’s one key player, Germany, whose nationalist strategy may well hasten the single currency’s end.

Published on 28 April 2010 at 13:14

This is another “perfect storm” raining down on Greece and Europe, on the stock markets and sovereign debts. Clearly, the Financial Times was not wrong when in early February it warned the world: watch out, the hedge funds have $8–10 billion in short positions, which they’re ready to stake on the collapse of the eurozone under the weight of its debts. The attack has been launched and the domino effect is not only possible, but increasingly probable. This bloodbath, which has already cost €160 billion, teaches us two vital lessons.

New offensive against Portugal

Lesson 1: The markets are pointing at something high up in the sky. As always, the fools are looking at the pointing finger and don’t see the moon. The finger is Greece, a country now going to the wall. The latest downgrading of its debt puts loans to Athens on a par with “junk bonds”. According to US investment banks, these are the highest-risk short-term securities in the world. In this situation, the more Greece looks for funds on the market, the tighter the noose around its financial neck. The more it tries to wriggle free, the more it ends up choking itself. That was all foreseen. And those now pretending to cry are shedding crocodile tears.

But in the speculators’ cold-blooded logic, Athens is but a decoy. The real target, the moon we don’t see, is greater by far: it’s the euro. In the kitty on the green gaming table where the states and markets are playing their hands, is the monetary union. As a matter of fact, the offensive has already been launched against Portugal, a country whose sovereign debt rating has already been downgraded and which is headed down the same inexorable road as Greece. Portugal is the next sacrificial victim.

German position is coherent but wrong

But that only amounts to the default of two peripheral eurozone economies. The real disaster can get rolling right after that. Greek tragedy, Portuguese fado, segue into a Mediterranean drama on a grand scale: Spain and Italy are already on the speculators’ blacklist. “Pigs” or not, we’re talking about the third and fourth-biggest economies in Euroland, countries considered “too big to fail” because they’re too big to bail out. But it’s clear that, if and when it’s Madrid and Rome’s turn to burn, we’ll be looking at a whole different world and a whole different Europe. That is the moon the speculators have set their sights on: the markets are betting on the collapse of the monetary union. And the bad news is they are winning.

Which brings us to Lesson No 2. The markets are prevailing because the states are disbanding. And one country in particular is veering away the others. The Franco-German axis that has guided Europe in crucial moments has fallen apart, and chancellor Angela Merkel is now all alone against the rest of the continent. The Greek debacle, with the euro-ravings sparked by a bailout plan poorly or perhaps never really piloted by the Germans, is now unveiling the other face of Germany. In the perfect storm of the past few months, the German position is coherent but wrong, as Wolfgang Munchau wrote in the Financial Times in mid-March. Contrary to Germany’s proven valour at the finest moments in its history over the past two decades (since the country’s reunification), present-day Germany is taking a selfish and unilateral approach to its responsibilities towards Europe.

Speculators have cottoned on

Even yesterday’s emergency European summit, with Greece about to default and the financial markets falling apart, took a backseat to a strictly “domestic” agenda item: the elections in North Rhine-Westphalia on 9 May. Merkel’s cabinet, pushed to the right by Guido Westerwelle’s Liberals, will not and cannot give the public the impression it is giving in to the eternal “Latinos”, the lax and irresolute Club Med countries. With its “reluctantly Europeanist” attitude, Germany has supplied formidable weapons to the raiding speculators. If Euroland is incapable of laying down the same rules for everyone regarding fiscal discipline, price stability and economic competitiveness, then the euro’s days are numbered.

Speculators the world over have cottoned on, and like a pack of dogs they are zeroing in on the weakest members of the herd. The people and policymakers of Germany fear that onslaught, which is why they seem to be fantasising about a “different” idea of the eurozone: a monetary union restricted to countries that accept rigorous shared rules of financial stewardship and controlling inflation. In this scenario we’d no longer have one single currency, but two: a first-class euro for the fiscally virtuous northern countries and a second-class euro for the less financially fastidious southern countries. German economists and Anglo-American bankers like Taylor Martin have publicly aired this scheme and even come up with names for the new currencies: the “neuro” and the “sudo”. Seems like a game, but it isn’t. Yet the governments of Europe have not understood that, and go on playing poker under the volcano.


Ratings agencies against the ECB

“Ratings agencies are once again fanning the flames, ” writes Jean Quatremer in his blog, Coulisses de Bruxelles(Behind the scenes in Brussels). Quatremer points out that agencies like Standard & Poor’s, Fitch and Moody’s are threatening to undermine the independence of the ECB, which usually “only lends to commercial banks that supply collateral assets rated BBB- or better.” Now that Greek ratings are being downgraded, banks are offloading their Greek bonds and contributing to the crisis. “It is urgent that the ECB respond with a clear message that it will no longer require a minimum rating for sovereign debt, at least not for eurozone countries,” points out Quatremer. If it fails to do this, “it will mean that its monetary policy will be effectively dictated by third parties: in this case, US based ratings agencies.”

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