Daily: Why Angela Merkel has hitched her wagon to the ECB

The weekly will be a more in depth look on the ECB but here’s today’s daily first. I will be on Headline with Howard Green on Monday at 1230 to talk about all the headlines of the day.

I just want to focus on one aspect of the euro crisis – and that’s Angela Merkel’s support for monetization. I have been saying since 2010 that monetization was likely and since last year that crisis in Spain and Italy would be the trigger. Now we have finally arrived. And, it is the German Chancellor’s being fully behind this move that has allowed it happen. The question then is why is she putting her weight behind the ‘money printing’ route?

I talked about this last month when I wrote “The end of European bailouts and the beginning of monetization“. The crux of the matter here is the combination of rising German sovereign debt, coming elections and German sovereign downgrades. This is a toxic brew for any politician looking to get re-elected in a German general election campaign. Put simply, the bailouts are over. Germany is not going to commit more money to bailout funds for Greece, Spain, Italy or anyone else when a general election is looming given Germany’s over 80% government debt to GDP and imminent loss of AAA status.

But Merkel knows that Spain and Italy are too big to fail. If either of these nations implodes and defaults or leaves the euro zone, the other would implode as well – and then it would be game over for the euro zone. Moreover, this would crystallize massive looses on German bank balance sheets and create serious problems for German liabilities in the Target2 clearing system. Put simply, running through Italian default scenarios leaves one with an overriding sense of panic, knowing that a Great Depression would be the outcome. So Italy and Spain must be saved at all costs – just not with more money directly from the German government.

Enter the ECB.

Now, notice what Joerg Asmussen, Merkel’s man at the ECB, says in defending monetization:

It is loans and guarantees that have been granted. Up to now, the rescues have not cost German taxpayers one euro, but of course there are risks. Germany is the biggest beneficiary of monetary union and the single market. Millions of jobs depend on exports to Europe. If our neighbor are in a bad way, it affects even Germany in the long run.

That’s a telling statement. That’s what’s on Merkel’s mind right now. If she wants to have any hope of re-election, she needs to act like she’s playing hardball. But she also needs to give Spain and Italy enough leeway to prevent Germany’s economy from rolling over in a way that could prove fatal for her party next year. Up until now the schizophrenic policy of bailouts and austerity accomplished this. But bailouts are out. Monetisation with strings attached is the new policy.

Merkel defends ECB after German outcry | Reuters

“Chancellor Angela Merkel defended the European Central Bank on Friday after its plan to buy the debt of troubled euro zone states stirred outrage in Germany and threats from some in her own party to try and block the scheme.”

BBC News – The globalisation of work – and people

“As a result of connectivity and globalisation millions of jobs across the world are disappearing.

This hollowing out of work is seeing the disappearance of middle-wage, middle-skilled jobs such as managers, secretaries, or assembly line workers.

These jobs are at risk because they can either be outsourced to a region with lower wages, or they can be replaced by technology.

So what is left is the jobs at each end of the skill and wage spectrum.”

White House consults experts as it mulls tapping oil reserve | Reuters

“Obama administration officials met with a handful of oil market experts on Thursday as the White House considers the merits of another release of emergency oil reserves – potentially one much larger than the last.”

Obama Campaign Confident It Has Many Roads to Re-Election – WSJ.com

“Without Florida’s 29 electoral votes, Republican nominee Mitt Romney would need to run the table, flipping state after state that the president captured fours ago. Polls now show Mr. Obama with a slight lead in Florida.

“We have to win Florida. I don’t think there’s any doubt,” said Brian Ballard, a longtime Florida political consultant who is a co-chair of Mr. Romney’s finance committee in the state.”

Facebook Investors Know Exactly Whom to Blame – Bloomberg

“So who is to blame if you lost money on Facebook? The fault is entirely your own. This isn’t a game for crybabies.”

German Stock Ownership Highest Since 2007 as Yields Fall – Bloomberg

“Germans are turning to equities for appreciation and income as policy makers take steps to tackle the euro-area debt crisis. The DAX Index has surged 22 percent in 2012, the second-best performance among 24 developed markets tracked by Bloomberg.”

Intel cuts outlook on weak PC demand; shares slump | Reuters

“Intel Corp cut its third-quarter revenue estimate more than expected on Friday due to a decline in demand for its chips as customers reduce inventories and businesses buy fewer personal computers.”

China approves $157 billion infrastructure spending | Reuters

“China has given the green light for 60 infrastructure projects worth more than $150 billion as it looks to energize an economy mired in its worst slowdown in three years, fuelling hopes the world’s growth engine may get a lift from the fourth quarter.”

Fastest UK production since 1987 signals recession end | Reuters

“The economy is likely to show some growth in the third quarter thanks to the rebound in production and sales of tickets for the London Olympics and Paralympics, which may add 0.2 percentage points to growth in the third quarter.

Manufacturing output jumped 3.2 percent in the month of July after a drop of 2.9 percent in June, when an extra holiday to mark Queen Elizabeth’s 60 years on the throne hit output, the Office for National Statistics said.”

German industry output unexpectedly climbs in July | Reuters

“Production in Germany climbed 1.3 percent on the month in July as factories churned out 3.8 percent more capital goods and 2.2 percent more durable consumer goods while construction activity increased by 1.9 percent.

The headline figure came in well above the consensus forecast in a Reuters poll of 44 economists for a stagnation in July and beat even the highest forecast for a 1.0 percent rise.” 

The Consumerist » Wells Fargo Sends Crew To Foreclose On Home That Doesn’t Even Have A Mortgage, Shrugs

“A California couple says Wells Fargo made a huge mistake by trying to take their home and now they’re not being very helpful in getting the family’s belongings back to them.”   

Hollande says rich ‘will pay more’ tax – FT.com

“The rich will “pay more” as France faces its toughest budget for 30 years later this month, President François Hollande said on Friday, despite reports that his pledge to impose a 75 per cent marginal income tax rate will be watered down.”

US Stocks Have Retraced the Recession – MarketBeat – WSJ

“Stocks are right back to their levels from, you guessed it, December 2007.

The DJIA rose 245 points, or 1.9%, to 13292, its best close since Dec. 28, 2007. The S&P 500 rose 29, or 2%, to 1432, its highest close since Jan. 3, 2008. The Nasdaq Comp rose 67, or 2.2%, 3136 — the Nasdaq actually hit its best level in about 12 years, which puts the index only about 38% from its all-time high.”

Markets Applaud Draghi’s New, Improved Kick the Can Down the Road Strategy « naked capitalism

“The eurozone mess is the classic illustration of a saying attributed to Herbert Stein, “Economists are very good at saying that something cannot go on forever, but not so good at saying when it will stop.” But while it once looked like market pressures would force a change in policy, it now looks like the shift will come as a result of punitive austerity, either open revolt or widespread disobedience. And they can be as abrupt as market events.

So while Draghi may have achieved what many commentators see as a firm defense, what he has constructed is the economic equivalent of a Maginot line. While it could be an effective bulwark against financial market attacks, it remains vulnerable to political and legal outflanking.”

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