What next for the Euro? As forecast in this blog, the Euro-zone countries have been forced to stump up a massive rescue package in order to avert a sovereign debt crisis in Greece and other Euro-zone countries. Will that be enough? Possibly not, if the continuing state of unease displayed by the financial markets is anything to go by.
In this ongoing tacit negotiation between the Euro-zone countries and the financial markets, one problem is that the Euro-zone “negotiation team” need to project an air of certainty and conviction about their commitment to the Euro and each other. Yet the key members of that team, President Sarkozy and Angela Merkel, look about as united as Katie Price and Peter Andre.
Any disunity in the team on one side of a negotiation will always be picked up by the other and exploited to its disadvantage. So, irrespective of their differences, Sarkozy and Merkel need to stop looking like the Odd Couple, and start looking like a dream team, or they will inadvertently prolong the very crisis they are seeking to bring to an end.
Together with the IMF, the EU has created a loan-and-guarantee package worth €750 billion. This is intended to stop international money markets forcing up government bond interest rates – in Greece, Spain and Portugal – to such unsustainable rates that their debt collapses under its own weight, and sparks a wider Euro-zone debt crisis.
The package included €220 billion provided by the IMF, €440bn of government-backed loan guarantees and a commitment for the European central bank to buy European sovereign bonds. What’s more, to combat rising financial market tensions triggered by market fears over public finances in the weaker Euro-zone countries, the EU decided to more than double its existing payments facility used in 2008 to help Latvia, Hungary and Romania – increasing it by €60bn to €110 billion. All of this is on top of the €110 billion rescue package agreed by the EU and the IMF for Greece only days earlier.
The extent of the package underlines the threat the debt crisis has posed to Euro-zone stability. Anders Borg, Sweden’s finance minister, said: “We are seeing wolf-pack behaviour in the markets, and if we don’t stop these packs, they will tear the weaker countries apart.”
There was initial positive reaction to the package from the markets. Erik Nielsen, chief European economist at Goldman Sachs, said the outlines of the package were impressive; “In any comparison, in terms of financing needs in southern Europe, this is a substantial amount.”
However, that optimism seems to have evaporated and has not been re-captured by announcements of austerity packages from two of the most debt-laden Euro-zone countries, Portugal and Spain.
The Dollar now stands at US$1.25 against the Euro, slightly up from its horror level of US$1.19 at the beginning of June. But the exchange rate is a long way from the US$1.43 level at which it stood only 4 months earlier. There is now concern that the economies of the 16 Euro-zone countries are so disparate and the debts of the weaker countries so enormous, that the Euro itself cannot survive as a common unit of currency.
What is contributing to these fears? For the answer, we need to put the microscope on the personal chemistry between the bed-fellows at the historical heart of Europe’s economic and political composition.
Alignment between France and Germany has always been the key to EU stability ever since the creation of the first European Coal and Steel Community in 1952. On the face of it, France and Germany displayed a unified front concerning the rescue package. Angela Merkel declared that the deal proved that, “Europe can act together to defend our common currency against attacks”. Christine Lagarde, French finance minister, said the response from international authorities was “consolidated, coherent and determined”.
However, whilst France and Germany profess a united approach, Angela Merkel faces deep political problems over continued German support for the Euro. Germany has to contribute more to this kind of package than other countries because it has the biggest economy. Complaints about Germany leading the Greek bail-out have been very vocal. Merkel has recently lost elections in North Rhine-westphalia and last week narrowly avoided her choice for presidential nominee being voted down by her own party colleagues.
So, the two leaders therefore face different political contexts. On top of this, there are striking behavioural differences between them. Sarkozy negotiates from the “heart”, using plenty of disclosing behaviour and creating emotional pressures and incentives to get his way. There is even talk that he threatened to pull France out of the Euro unless Merkel agreed to the latest EU plan to stabilise the currency. Merkel is much more of a “head” negotiator, using rational behaviours such as “proposing with reasons” and “testing and probing” of positions to secure her needs.
“Heart” and “head” negotiators often find it difficult to negotiate together because of their differing styles. These differences make them wary of each other. Heart negotiators find head negotiators aloof and cold; head negotiators find heart negotiators too emotional and impulsive. Moreover, these differences are accentuated when the parties are under pressure, when we all tend to default to our favourite behaviours.
We might expect financial markets to pounce on this schism in “Team-Euro” soon, anxious about their lack of unity and as a result betting against the Euro once again.
If, as expected, the Euro-zone countries are required to put together yet another rescue deal in response, then that lack of natural empathy between Sarkozy and Merkel may yet de-rail the Euro. When you are under pressure to get a deal done you need to be able to trust your team mates instinctively. As Elvis so rightly put it, “we can’t go on together with suspicious minds…”