Commentary: Merkel may think this is power struggle – but all she has done is make euro's fight for survival even harder

Published on Wednesday 19 May 2010 23:34

ANGELA Merkel's use of stark language on the euro yesterday is no less than the German chancellor setting the stage for the German writ to run in Europe, and particularly on regulation to become law.

If then, this is a power struggle between Germany and, say, France over regulation and who will lead the battle for euro survival, France might as well pack its bags and head home. However, whether the euro will survive a German-led assault to garner complete EU-wide regulatory control of financial markets and, indeed, of member state budgets, is to be doubted.

By taking such a heavy-handed approach, all the German chancellor has done is to make the euro's battle for survival even tougher. In the process, she has not only undermined the euro but also German financial markets, the eurozone area and the EU as a whole, by undermining trust in the markets.

Some of what Mrs Merkel said was commendable. For instance, pointing out the euro is in great danger is as frank an admission of currency weakness from any chancellor in living memory. So, too, is the suggestion countries that violate euro-area budget rules should be denied aid, and even the possibility national budgets of EU states might eventually be independently reviewed.

But her comments seem to back up the calls for increased regulation and control of banks she has been pushing forward, while ignoring the profligate spending by EU governments that failed to obey the Maastricht budget deficit rules.

You wonder whether Mrs Merkel has any idea of the importance banks will have to the future of the European economy. Additional regulation will play into the hands of other financial markets, which is why it is concerning she has imposed a ban on naked short selling on euro government bonds and credit default swaps on the ten leading German financial institutions until the end of March 2011.

Not surprisingly, the euro took a hit as global markets grappled to understand why the nation that is supposed to be at the heart of the euro economy should seek to restrain the largest German institutions in such an unnecessary manner.

If it is part of a pre-emptive brick-building exercise by Mrs Merkel ahead of Europe-wide financial market regulation, the manner of its handling means it has already backfired.

Major German institutions will suffer as a result of this move and so, too, will the rest of us.

I will puzzle for a few more hours yet about the motive behind Mrs Merkel's determination to undermine the euro economy at this difficult time. Inflicting another wound on the euro at this point, backed by a phoney excuse that it assists the momentum of European regulation, is not going to wash.

• Howard Wheeldon is senior strategist at BGC Partners.