All eyes on Europe as leaders head for Jackson Hole
I was struck when I noted the following in the Wall Street Journal this morning: “MADRID – The Spanish government would like to see the ECB commit to massive, open-ended sovereign-debt purchases before it asks for help financing itself, Finance Minister Luis de Guindos said, as expectations mount that the country will ask for a new bailout.”
I might be crazy, but I’m not stupid. He might as well have said directly “If I issue any amount of bonds in the market and you buy them endlessly ” à fonds perdu”, then I won’t have to ask you directly for cash.” Charming.
Normally the end of August is a quiet period in the markets, especially the week running up to the Fed’s central banks annual off-site shindig at Jackson Hole. But the eurozone’s persistent inability to stop chasing its own tail makes this week just as relevant and full of uncertainty as all the others.
In fact, in many respects it carries higher risks as Antonis Samaras, Greek Prime Minister, prepares to undertake his first formal trip to Berlin and Paris. It appears to be an open secret that he is planning to ask for a softening of the austerity terms which have been imposed upon his country as we approach the next critical deadline.
To some extent, one has to have sympathy with the poor chap as the bottom of the austerity-induced recession which had been expected to have been reached by now doesn’t even appear to be visible yet. In essence he wants to – and needs to – ask for more time. But Der Spiegel reported over the weekend that both the finance minister and the majority leader in the Bundestag, Wolfgang Schaeuble and Volker Kauder, respectively, have let it be known that they have no truck with backing down any further when dealing with the Greeks. What Athens may or may not be able to achieve fiscally is a matter of faith and prayer but it is hard to dispute that in the two and a half years since the crisis began, it doesn’t appear to have met a single target, be that of the ones imposed by its eurozone partners or of the ones it had set itself. The privatisation project is a case in point.
Circular debates are not the exclusive privilege of the eurozone. Former British Chancellor of the Exchequer, Alistair Darling, pitched up in the press over the weekend, poking at his successor, George Osborne, about broken promises for a recovery in the UK and calling for a change of tack before “immeasurable damage” is done to the economy.
I won’t dwell on who started it but Osborne, very rightly, observed that Darling had presided over the largest peace-time deficit this country has ever had – and that when the economy was supposed to have been firing on all cylinders. Darling rather fatuously writes “And George, you must build more houses – it helped get Britain out of depression in the 1930s…”
How about “And George, you must colonise Africa – it made Britain very rich in the 1870s…”? In quoting John Maynard Keynes’ famous comment that “when the facts change, you change your mind”, he calls for a “Plan B” which Osborne has always maintained does not exist.
The painless exit option evidently isn’t there and although Osborne has produced a few absolute pearlers, the key strategy, as horrid as it might appear, seems to be right. More to the point, his boss, David “Call me Dave” Cameron, who looks to spend his life trying to play to any and every populist gallery have might be able to find has remained resolutely loyal to his Chancellor. The Prime Minister has attracted considerable ire from his natural constituency in the way that he always seems to be so unsure of his ideological footing but with respect to his faith in Osborne, he has never wavered.
Whether Greece, Spain, Britain or the US, no matter how elegantly and imaginatively you cut and stitch a 10-foot square cloth, you will never make it cover a 12-foot square hole. For nearly 50 years, the solution was to go and borrow the missing two-foot square. I suppose we have spent five years now looking at different approaches to that particular problem and still can’t find any way forward other than reducing the size of the hole. As the central bankers don their shorts and hiking boots and hit the trails of Jackson Hole, they will no doubt once again be asking themselves when the polis will finally get that message and desist from leaning on them to bail them out.
Search for flexibility
Evidently, the Samaras trip will be tough and the Berlin government will make all the necessary noises about no more flexibility and no softening of the terms but the markets won’t care any more because they know that somewhere, behind closed doors, a deal will be done.
All the while, the European economic outlook deteriorates gently – not at a high speed – which confirms the presence of an “L” shaped recovery. All we have to try to guess is whether we are half way through the lost decade or whether we are supposed to start measuring it from here. As I noted a few weeks ago, the lost decade in Japan has already lasted 20 years.