Is Merkel the Herman Cain of the Eurozone: NEIN - NEIN - NEIN? (And Why It Matters to the U.S.)

06/06/2012 02:34 pm ET | Updated Aug 06, 2012
  • Terry Connelly Dean Emeritus, Ageno School of Business - Golden Gate University

German Chancellor Angela Merkel faces rising challenges to her leadership of the austerity regime her country has imposed on the weak sisters of the eurozone in exchange for German-funded bailouts of their sovereign due-bills (many of which are owed to German banks, by the way).

First, she is being challenged to allow consideration of using the Euro Stability Mechanism funds to strengthen directly the capital position of Spanish, crushed under the weight of bad real estate loans and now a run on deposits, like the U.S. TARP program, rather than indirectly through Spain itself. This latter course would, of course, actually increase sovereign debt (as happened already in Ireland) to knife-edge levels, but it also would also trigger a "troika" receivership structure on Spain's budget with German-style visitation rights, which Merkel's citizens like the feel of. So far, her answer to this proposal remains "nein."

Second, the chancellor is being asked to relent in her opposition to the European Central Bank taking direct action to prop the market for Spanish sovereign debt by renewing its limited but heretofore effective purchases in the market to keep the market interest rates Spain must pay at a level its GDP can sustain. Again, so far, the message from Merkel remains "nein" because Germany's orthodox central bankers don't like this idea (strangely, as it would probably spare German some embarrassing losses on their books later).

Third, Ms. Merkel is being urged to open the door to quick consideration of creating a mechanism for the issue of eurozone bonds that would have the effect of "federalizing" debt, coupled with a new central authority that would monitor and harmonize the fiscal and taxation policies of the various member countries to assure the credit markets that what has happened with sovereign debt in the currency union would never happen again. The Germans like the latter part of this idea (central controls) but aren't too wild as yet about eurobonds -- again, the answer remains "nein."

For the moment, then, the United States economy, which trades extensively with Europe, is held hostage to the "Just Say No Chancellor," who seems to believe that doing what financial markets are begging you to do is a sign of weakness -- that governments should not let bondholders push them around. We can forgive a physicist raised in Communist East Germany for having an instinctive loathing of bond markets; even Bill Clinton had to be schooled by James Carville not to pick a unnecessary fight with the bond market. But this is getting ridiculous.

Sometimes it seems that the chancellor would rather go down in history as the German who sank the euro rather than appear to be following a made-in-America idea (a TARP-like direct rescue of the impacted Spanish banks in order to stop the bleeding and give the markets time to heal). Yet she seems willing to make the same mistake, however, that U.S. officials made when they said there was no legal basis for stepping in to save Lehman (at a cost of a few billion dollars and an increase in moral hazard) and instead would up the costs nearly a trillion dollars in bailouts plus the Great Recession and the fiscal cost of stimulus.

Maybe Merkel is right that there is no direct authority for the ECB to do massive sovereign debt purchases, or for the eurozone countries to agree to underwrite bank deposits -- but at some point, it must be clear that the euro treaties should not be interpreted as a suicide pact!

Nothing much can happen in terms of changing Merkel's mind before the French and Greek elections on Sunday, June 17. But perhaps meanwhile another vision of Merkel's mind will emerge -- that she has indeed absorbed the great lesson of capitalist negotiations -- she who comes to the table as the loudest "no" is the one who eventually defines the "yes"! We can only hope.