Published in Business Spectator (Melbourne), 27 May 2010
As if the uncertainty over the future of the euro was not bad enough, Germany keeps adding further confusion. Last week, Chancellor Angela Merkel’s government triggered a slump in global markets by banning naked short-selling and calling for stricter regulation of financial institutions through the G20. The shockwaves could be felt from Wall Street to the Australian Stock Exchange.
If international investors had been a little more familiar with German politics, they would have ignored Merkel’s new anti-capitalist posturing. For the moment it amounts to little more than political window-dressing of a chancellor who is desperately clinging on to power. As such, it is no substitute for the painful decisions that Europe really needs to take. The long-term consequences of the new populism will be dangerous if they are not stopped at next month’s G20 summit.
The ninth of May 2010 is a day that Angela Merkel will not forget too soon. It may well turn out to be the day that sealed her political fate. That her party would lose a key state election was anticipated, but no-one had expected the extent of the political landslide. Gone was her control of the upper house, gone her ability to implement any major legislation without the support of the oppositional Social Democrats, Greens and post-communists.
To make matters worse for Merkel, it was on the same day that her government had to cave in to French demands for a massive shock-and-awe stability package for the embattled euro. To add insult to injury, President Sarkozy could not resist proclaiming that the solution was ‘95 per cent French’. Never before had a German chancellor been so publicly humiliated on the European stage.
Under such pressure, both domestically and within the European Union, Merkel needed a quick fix to regain the initiative. Or, at the very least, she wanted to look as if she was still doing something. Getting the Bundestag to approve the massive guarantees for ailing European economies was difficult enough: even within the coalition government dissenting voices were getting louder.
With her surprise attacks on speculation, Merkel managed to temporarily solve all these problems. It enabled her to pass the blame for all recent difficulties on some faceless, greedy speculators. It also meant that everyone stopped talking about the gargantuan sums that Germany must still provide to shore up the euro. Better still, she could snub President Sarkozy by not informing the French of her decision prior to the announcement.
Above all, for the first time in this whole, sad crisis, Angela Merkel seemed to be taking the initiative. In terms of playing politics, it was sheer brilliance.
In all other respects, Merkel’s new attack on speculation is anything but brilliant. As a new regulation it is pointless and ineffective, yet it will poison political debates for years to come. It has also increased the cacophony within the European Union without contributing anything to the solution of the euro crisis. Angela Merkel has gained a short-term political victory at the cost of long-term economic damage. This makes her guilty of the worst kind of cynical populism.
International markets went into panic after the German government’s announcements, but only because they had not read the fine print. Yes, it is true the Germans had banned naked short selling for several financial products. However, the regulations only applied to transactions within Germany – hardly an important marketplace for these products anyway. To make Merkel’s regulation even less consequential, international subsidiaries of German banks were exempt from the short-selling ban.
A cursory look at the German measures would have revealed them as what they are: absolutely pointless. Analysts at Bank of America summed it up nicely when they asked: “What’s Germany going to ban next? Rainy days, harsh words, the Macarena?”
The point of Merkel’s anti-speculation exercise was of course not to ban anything. She is clever enough to know that she was only firing blanks. But the smoke and mirrors she created were sufficient to distract from a wide range of failures: the failure of her government, the failure of the euro, her own personal failure as Chancellor. Instead, Germany could unite against the imaginary attacks of evil speculators.
It is a strategy that has worked well for Merkel, although it has turned German politics into a theatre of the absurd. At the very moment when the eurozone is about to turn into an inflation and transfer union with disastrous consequences for German savers and taxpayers, the country is focussing on the regulation of hedge funds instead (which most politicians only know from hearsay).
Only an economically illiterate population would fall for such an obvious sleight of hand, which is why it works so well for Angela Merkel. The Germans truly have the chancellor they deserve.
For the rest of the world, this development is dangerous. As long as the Germans pretend that the current crisis was caused by speculation and not by inherent flaws of the European project, this crisis will not pass. They can ban short selling, regulate credit default swaps or outlaw hedge funds all they like, but this will not solve the competitiveness problems of Club Med countries. Even a Macarena ban looks like a more promising alternative.
The other danger is that Germany’s new populism may turn out to be contagious. Not content with implementing their non-solutions at home, Chancellor Merkel and her Treasurer Wolfgang Schäuble are seeking to regulate financial markets through the G20. Apart from bans and regulations, this includes plans for a range of taxes on financial institutions and market transactions.
Other countries may well ask themselves why they should be joining in Germany’s populism driven orgy of financial masochism. The Canadians, hosts of the next G20 summit in June, have already expressed their concerns over these initiatives. Who could blame them? Like their Australian counterparts, Canada’s banks have weathered the global financial crisis almost unscathed. Why would the Canadians feel the need to punish them now with new regulations and taxes?
Australia, too, should be wary of European-led G20 initiatives to regulate the financial sector. It is bad enough that the European debt crisis has already damaged our risk-sensitive currency, hurt the Australian stock market and cost us dearly through contributions to the International Monetary Fund.
The least we should now demand from our government is to fully reject European G20 demands to join in their populist bashing of speculators. Given our Prime Minister’s own track record in practical populism, particularly in this election year, we should not get our hopes too high.
Perhaps Australia, too, has the politicians it deserves?