Comment: German retreat is orderly but it’s still a retreat

By GEORGE KEREVAN
Published on 30/06/2012 00:00

IN THE end, Angela Merkel blinked first. Yesterday the markets reacted favourably – ecstatically, even – to the deal reached in the early hours of Friday morning by the 17-member eurozone, to aid Europe’s ailing banks and sovereign debtors.

Following 14 hours of unusually frank debate, Germany finally agreed, after two years of “nein”, to allow more flexibility in applying eurozone monetary and fiscal rules. Banks will get capital injections directly from the new ESM bail-out fund. Member countries will also access the fund for their sovereign debt requirements without harsh new austerity measures that derail growth.

In return, Germany gets two concessions: a new body will supervise all eurozone’s banks, presumably to ensure they are properly capitalised; plus a move (without timetable) to some sort of fiscal union that allows Germany to veto profligacy by eurozone members.

Is this deal the “game changer” that ends the euro crisis? Like every other eurozone fix that unravelled, the devil is definitely in the unannounced details.

Unfortunately, like every other eurozone fix, those details remain sketchy. It is a deal only “in principle”. Much depends on the timing. The new supervisory body needs to be up and running before banks can tap the ESM, which could negate any short-term impact and plunge the eurobond markets into fresh turmoil.

Germany’s constitutional court also has the ability to throw a spanner in the euro works. The court may decide that any fiscal union requires ratification in what would be Germany’s first post-war referendum. Such a referendum would not result in an automatic “yes” vote. There is opposition in Germany both to the euro and further European integration. A key wing of Merkel’s own Christian Democrats, the Bavarian CSU, opposed the euro.

Yet my sense is that something has changed. Germany is engaged in a fighting retreat but she is giving ground. Merkel’s tough talk is mainly for domestic consumption in the run-up to next year’s federal elections. In Germany, commentators have accused her of dithering rather than doing the deal everyone sees as inevitable. The Social Democrats and Greens, who currently lead the polls, already go further than Merkel and support collective eurobonds. Merkel’s iron finance minister, Wolfgang Schäuble, will support collective debt provided he gets fiscal union.

Once those pesky elections are out of the way, expect resolution. The key question: can the deal bridge the gap between then and now? In the UK, it is a poisoned chalice. It means a 17-nation mega state with a unified banking system. How London could remain Europe’s banking capital seems difficult to imagine.

Diamond geezer may be on the defensive

I’M NOT one for kicking somebody when they’re down, but it is hard to see Bob Diamond, CEO of Barclays, keeping his job. Either he knew what was going on when his traders were busy rigging libor interest rates. Or just as bad, he didn’t.

However, it is worth re-stating just why Diamond got to be head of Barclays in the first place. He built the bank’s investment arm, Barclays Capital, from nothing. Today, it provides half of Barclays’ pre-tax profit and two-thirds of its assets. As a result, the bank avoided having to be rescued by the government in 2008.

This may explain why Barclay’s board let Diamond keep his bonus last year. But with politicians scenting bankers’ blood, Barclays may have to find a chief executive who is skilled at defence rather than offence.

Football and the euro, so easily confused

I’VE been taken to task by Carsten Brzeski, chief economist of ING Commercial, for criticising his tweet which read: “Germany kicks Greece out of the euro. It could happen next Friday.”

Brzeski maintains this referred to the Euro 2012 fixture, not a meeting of eurozone finance minister on the same day. As it happened, Greece lost 4-2 but stayed in the euro.

I’m happy to put this on record. Equally, I still think Brzeski was being deliberately ambiguous in order to make a joke. My Greek colleagues have long since ceased to laugh at north Europeans making jests at their expense. Someone in Brzeski’s influential position might take that to heart.