"With so many momentous decisions to be taken within the EU, I wondered how you and your fellow citizens view the situation as it is unfolding. Do you see the end game, in terms of how all of this will play out?
"I trust that you are well."
David Fuller's view I sent the email above to a Bavarian
friend, Erwin Grandinger, yesterday evening. I did so because I do not always
trust American or British views on the eurozone, including my own. Brits in
particular have issues with the euro, which I understand and often share, but
they can impede our objectivity in the current crisis. Also, one cannot know
or intuit everything, which is why I always like hearing from knowledgeable
people within the Collective of subscribers on subjects where they have considerable
knowledge, insights and firsthand experience.
Veteran subscribers will know of Erwin Grandinger as his views have appeared in Fullermoney over the years and can be found in the Archive by using the 'Search' facility (shown upper-left, fourth item down). For the record, he is an independent political economist and consultant at EPM Group Berlin. He has also been a guest columnist with the German daily DIE WELT for over 12 years. Dr Grandinger's acclaimed book: "Beyond Repair: Germany in the Midst of Systemic Change", published in March 2010, discusses problems in the welfare state. An English translation of the introduction is also in the Archive and hopefully the entire book will be published in English at some point.
Here is the opening from Erwin Grandinger's detailed and illuminating reply to my email above:
"There is a clear disconnect between what fund managers think / believe, and what is happening on German streets.
"The virtual world (financial markets) believe they experience a crisis and are partially in panic (how do you explain the German-Austrian 10 yr. yield spread explosion?). The real world (German voters) has, in general, not the slightest concern when it comes down to the "Euro". Nice theme on TV, but does not existent in your daily life.
"Take the city state of Berlin. The city has more debt than Argentina (over EUR 60bn). But the new SPD-CDU Berlin coalition government has just agreed to employ another 11.000 civil servants, and has come up with all sorts of welfare state goodies for voters... No sign of "austerity"... There are only 12 companies in Berlin that employ more than 500 employees... Unlike Argentina, Berlin has no underlying business model, except tourism (exactly like Greece)...
"A tiny portion of Germans try to copycat the "occupy"-movement, but these guys are organized by the usual left-wing suspects (Greenpeace, Green Party, attack movement, etc.) which do know how to exploit anti-market, anti-capitalistic sentiment in Germany (certainly prevailing for a long period of time). "Lehman" 2008 simply re-confirmed their views.
"However, one aspect of the drama has become very apparent: the politicians have successfully managed to blame the "banks" in total for all the ongoing trouble. "Bad governance" by German / European governments regarding fiscal policies is not discussed. The "banks" have caused all of these problems... No one discusses the excessive, debt-driven welfare states (organized by generations of politicians) in Europe that have reached the limits of refinancing while their respective demographics are deteriorating.
"So, while a huge part of the Germans may not like the "Euro" (see many polls), the same huge part is not at all concerned about the stability of the currency and/or places like Italy. As you David have mentioned before, debt de-leveraging can take many years. Therefore the name of the game in Europe / the Eurozone is and can only be "muddling through", given the number of countries and political decision-makers involved. There is no quick fix and everybody understands this.
"Also, all lip-service apart, when push comes to shove German politicians expect the ECB to jump in and buy sovereign bonds directly. That is what I hear all the time here in Berlin. The "options" are: temporarily higher inflation (good to reduce government debt and to expropriate savers) or a defunct financial system. Politicians, Bundesbank and the ECB will of course go for the former. Buying sovereign bonds directly, truly, will only happen in the very last "second", i.e. when the "virtual" crisis has become a "real" crisis (from a German perspective, since the country is booming economically & mentally). The ECB and the Bundesbank (playing good guy, bad guy) need to keep the pressure up (Italy, Spain, etc.) as long as possible to enforce domestic political reforms (Italy, Greece)... When all options are exhausted, and only when, then the ECB will act more forcefully in my view.
"As an independent advisor and analyst here in Berlin I have also experienced a gradual, but very slow learning curve by Berlin politicians when we talk about the "Euro" crisis. In May 2010 (first Greek bailout package) politicians claimed that "we" can pay Greece out of our (German) pocket money. They had never heard before about CDSs, CDOs, yield-spreads, etc... They fully and comprehensively underestimated the problem. Now, 24 months later (after in Oct 2009 the Giorgos Papandreou government revealed that the Greek budget deficit figures are in fact much higher), they are still behind the curve to some extent, but they no longer underestimate the importance of the subject. In fact, they spent 90 percent of their professional time to deal with the issue.
"Italy (definitely unlike Greece) has an array of options: support from the ECB, IMF, EFSF (once it works properly), China/Asia, bilateral agreements (when experiencing repayment troubles in the 1970s Italy did borrow a few billion DM from Chancellor Helmut Schmidt and repaid everything including interest subsequently). Italy has a high savings rate, primary surplus and a huge and effective energy sector (ENA, business interests in Northern Africa). And a new (Mario Monti) government. Italy's Debt Office works highly professionally. The next major bond repayment is not before Feb12. With the new government in place Italy has gained some time. BTPs have printed an ending signal, as you also pointed out, last week. The pressure is off for the time being. So, we (the bond market vigilantes) have gone all the way from Greece, over Ireland to Italy. What's next? France? Germany? US? All of this is too predictable.
"The Germans will never let the Euro go. Market participants think along the lines of MBA school P&L. Politicians don't think so. For them the "Euro" was born out of the Holocaust. It is not negotiable. Simple as that. German politicians feel that we are in a transition period: from nation states to a more unified Europe. Time will tell whether we will end up with real EU Finance Ministry and German-inspired fiscal discipline rules... We may get there in the next 10-20 years. Not now. Now we are in muddling through territory. It is too early for all participants. That also means Germany will never leave the Eurozone on its own (as Anatole Kaletsky suspected a while ago). That is pure nonsense. Germany may accept that the Eurozone may have to shrink, before it can expand again.
"German Chancellor Angela Merkel has pointed out a number of times: the "Euro" is Europe. Many people disagree with that concept, but for the overwhelming number of politicians and for the most part of the German intellectual elite this is exactly the point. In less than 12 years the Euro has become the raison d'être for Europe in their view. In that respect, financial markets are behind the curve. They have failed to understand that philosophical concept in the context of what has happened in Europe since 1933."
My comment continued - If Erwin Grandinger is correct, and I think he is, then the next significant move for stock markets should be to the upside. This is also the Fullermoney view when we consider monetary policy (mostly accommodative), valuations (mostly reasonable and often quite attractive) and sentiment (still quite pessimistic and therefore a contrary indicator).
However, price chart action is the final arbiter. We saw a terrific stock market rally in October. Most share indices have given up some of those gains this month. The October lows need to hold if we are to see further gains anytime soon.