IS ANGELA MERKEL BEHAVING IRRATIONALLY?

By George Kofinakos
StormHarbour Representative in Greece
CEO & Executive Director Enolia Premium Capital S.I.F. (SCA)

Is Angela Merkel aiming, through her words and actions, to strangle the weak economies of the Eurozone? If yes, is she doing it to appease the German voters, by demonstrating a tough approach to those countries which are unable to comply with the Eurozone basic Economic Policies?

Inspite of what we hear all around about the irrational behaviour of Mrs Merkel, I believe she is working based on a plan.

Let’s go back about 15 years , when the policies of the Eurozone started being implemented.

The whole concept was built on the basis of a Zone that would share the same monetary policy, in an attempt to stabilize the Economy of the Eurozone by controlling interest rates and the money supply.

This is a role assigned to the ECB. But we all know that the Economy carries another interconnected parameter: that of the Fiscal policy, which is the management of government expenditure and revenue collection.

Centralizing the Monetary Policy with the EU having minor control over the Fiscal Policy was like putting the cart ahead of the horse.

No doubt, this structure has helped a lot those countries (Germany, Austria, the Netherlands etc) that stick to the rules in order to maintain their competiveness. On the other hand, countries like Greece, Ireland, Italy, Portugal and Spain have given no attention to salary and hiring increases both in their Public and Private sector, thus experiencing a diminishing competiveness of their Economies within a decade.

With the US Credit Crisis as a trigger point and later on the Dubai sovereign crisis, investors started focusing on the over-debted countries, demanding higher rates in order to buy their bonds! The weakest member of the Eurozone, Greece, served as the ground to establish an experiment in re-correcting the inefficiencies of the Eurozone and setting the tools of the effective centralization of the fiscal policy.

I trust that although they had the tools to stop this crisis at the very early stages with very minimal cost, Angela Merkel and her team decided to drive the weak countries near bankruptcy in order to achieve more easily the acceptance of the new rules of the game, which in the first phase is the EU/IMF Economic Mechanism.

What comes next?

Of course Germany would not like to destroy neither the Euro nor the Eurozone, since this is the base of the successful current German growth. Instead, they would like to streamline the situation, by driving the countries in the Economic Support Mechanism and eventually have them accept the centralization not only of the Monetary Policy but also of the Fiscal Policy. The current over-confidence that Germany rules, has given them the conviction that, through the markets, they can enforce the pressure to all the Eurozone countries to go along with these new rules, while at any point they have the capacity and tools (ie: the potential issuance of a Eurobond) to turn around the sentiment in the market.
It is a risky approach but, given the current circumstances, it has high chances to succeed!

Next act of the game is on December 16th at the Annual EU Leaders meeting, when the full strategy of Germany (and, to a lesser extent, of France) will most probably be revealed.

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