NEWS ANALYSIS: With election over, Obama may take off gloves against Germany
RE-ELECTED: US President Barack Obama speaks during his election-night victory rally in Chicago on November 7. Picture: REUTERS
US FRUSTRATION with Europe’s inability to solve the eurozone crisis is likely to come to the fore after the re-election of President Barack Obama, spelling bad news for relations with Germany in particular.
Mr Obama’s victory will have three effects on economic and monetary union — none of them particularly rosy.
Underlining the new, more worrying turn on union, the figures for the European Central Bank’s (ECB’s) intra-eurozone Target-2 payments imbalances, which were relatively positive for September, turned slightly negative again last month.
The Bundesbank’s claims on the ECB rose to €719bn from €695bn in September, although this was below the record €751bn for August.
What are the effects of Mr Obama’s win on Europe?
First, after months in which the White House and Treasury made clear their wish for Greece to stay in the eurozone to prevent a damaging pre-election financial collapse, the re-elected president will now have a much freer hand to say what he thinks about Europe’s irresolution.
If Mr Obama decides to take the gloves off with the Old Continent, this could lead to some wounding exchanges with Berlin. He will probably side more overtly with France and Italy to rail against alleged German intransigence on helping Greece and other problem-hit countries. This will not go down well with Chancellor Angela Merkel.
Significantly, the most resounding approval in Europe for his win came from France’s President François Hollande, who sees the US as an ally in his anti-austerity campaign.
Second, now that the election is out of the way, greater optimism about US economic growth may start to take hold internationally — depending on whether the so-far intractable issue of the US fiscal cliff can be resolved. This coincides with steadily worsening economic news from Europe. The gap between US and eurozone gross domestic product growth could widen next year to nearly 3 percentage points, the largest since the euro began.
On past form, this will weaken the euro — which will be good news for southern Europe, and bad news for resolve and morale in Germany and the other creditor countries.
Third, despite the pressure, German unwillingness to agree to more generous action over Greece, Spain and the others is likely to increase, not diminish, as the timetable moves into gear for next year’s German federal elections. A strong reason why the ECB’s trumped-up bond-buying plans are on hold is because the Bundesbank’s negative views on the matter have already been well-circulated in political circles and in the marketplace.
The "phoney war" on the ECB’s so-called Outright Monetary Transactions programme could continue until the new year. In terms of the effect on Spanish and Italian bond yields, we may have already seen the best of the OMT’s effects.
As the French 18th-century philosopher Voltaire opined about the Holy Roman Empire ("neither holy, nor Roman, nor an empire"), future historians may say the programme was neither outright, nor monetary nor a transaction. It is certainly taking a long time to get going.
This reflects the harrowing contradictions of the conditionality that requires the Spanish government to approach Europe for a further bail-out deal without being able to tell parliamentarians in Madrid what it will get in return.
The Bundesbank’s conditions for successful Outright Monetary Transactions are the same as it habitually applied to past foreign exchange market intervention. Action should be powerful, co-ordinated and in line with fundamental market trends. It is unclear whether the preconditions are in place.
The longer the delay in implementing the programme, the greater will be the resolve of its opponents. And the larger will be the reluctance to break the seals on a Pandora’s box that can be closed only with the greatest difficulty.
All this is compounded by further eurozone brinkmanship on Greece after international lenders failed to bridge differences on how to reduce Athens’ still-disastrous debt levels, bringing the country close to defaulting on a €5bn debt payment due at the end of this week.
Only nine months ago, Greece benefited from by far the greatest sovereign debt restructuring in history. Yet it is further away than ever from solving its debt problems, since austerity, as many people predicted, has made the debt problem worse.
This calamitous outcome occurred under the aegis of the International Monetary Fund (IMF). The combination of circumstances makes the IMF much less likely to get involved in further bail-out packages, whether for Greece or for other struggling states like Spain.
In his steely post-election mood, Mr Obama will join leading emerging market economies such as Brazil, China and India in declaring Europe must sort out its mess by itself. This can only mean more money from the Germans. Hardly likely to help Ms Merkel’s popularity, less than a year before her own elections. NEWS ANALYSIS
• David Marsh is chairman and co-founder of the Official Monetary and Financial Institutions Forum.
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