The euro zone is coming apart at the seams now
You can read it on Reuters:
The top German official at the European Central Bank is to quit early in disagreement with the bank’s policy of buying euro zone government bonds to combat the currency bloc’s debt crisis.
Clearly, Stark sees the monetisation path the ECB is on as not at all compatible with the ECB’s mandate.
Separately, the noises coming out of the German governing coalition show exasperation with the progress in Greece. Edward Hugh writes that “a Greek euro exit is no longer the unthinkable taboo topic”. This is especially true after the beating Angela Merkel’s party took in elections in her home state of Mecklenburg-Vorpommern this past weekend.
Fiscal consolidation is not expansionary. Moreover, it increases deficits due to the increase in spending on fiscal stabilisers and the decrease in tax receipts – that is unless the cuts are extremely large. There is zero chance that Greece will make its targets. I don’t expect Portugal, Italy, Ireland or Spain to meet their targets either, especially given the incipient double dip we are witnessing.
As the Germans are likely to see their fiscal trajectory deteriorate markedly in this environment due to the anaemic domestic demand and dependence on exports, their willingness to fund bailouts will evaporate. The political calculus may turn to topping up capital at underfunded German banks. Greece, at a minimum, will default. Indeed, without the ECB’s assistance Italy would default – that’s the real Armageddon scenario because no amount of recapitalisation would prevent a deep depression. Stark’s resignation increases the chances that just this will occur.
The euro zone is coming apart at the seams. Right now the economic outlook looks bleak. If you are a euro zone investor, the policy outlook is extremely volatile. That means avoiding the periphery and piling into German and Dutch bonds and/or gold because we are about to see how limited the ECB’s bond purchases are.
P.S. – Economics is not a morality play. Hopefully, you will have noticed that I don’t write about this in moralistic tones (using language that conveys undertones about ‘evil’ Germans, ‘lazy’ Greeks and so on). Anyone who does has an axe to grind and you should be very wary of the biases this creates for their analysis.