Fisher Investments Editorial Staff
Geopolitics, Developed Markets, Deficits

Ich Will Europa

By, 08/24/2012

German Chancellor Angela Merkel, it seems, is trying a novel way to rally her bailout-fatigued constituents around the euro: On Thursday, she released a promotional video, “Ich Will Europa” (“I Want Europe”), in which she and several German politicians, celebrities and athletes expressed their conviction that, as Merkel put it, “At the end of this path, we will have a sustainable and strengthened eurozone and European Union.”

It appears to be a shrewdly timed PR move, coming on the heels of a survey showing only about 50% of German voters favor staying in the euro—and one day before Greek Prime Minister Antonis Samaras arrives in Berlin to plead for a two-year delay of public-sector cuts. Merkel, as the leader of the eurozone’s largest benefactor, has an effective veto over Greece’s request. It’s clear she wants to do what’s needed to preserve the currency union—she’s endorsed every bailout and backstop thus far, risking significant political capital to secure enough votes in Germany’s Bundestag. But many Germans aren’t so supportive, which often forces Merkel to take a hard line to curry favor before her last-minute compromise. It’s a difficult tightrope walk—and the desire to improve the public’s opinion of the euro is thus understandable. 

Not that Merkel’s relying on a sentiment sea change—some in her government are already taking a hard line on Greece, and she’s keeping mum on her stance. Finance Minister Wolfgang Schäuble said, “More time is not a solution” to Greece’s problems, suggesting more time would “mean more money,” something he doesn’t seem keen to endorse. But Merkel merely says she won’t make any decisions before the EU/IMF/ECB troika releases Greece’s progress report, which likely happens in September or early October. The troika’s findings will also determine whether Greece gets a much-needed €31.5 billion aid tranche, which means the October 18 EU summit will likely be “make or break” for Greece … as all such summits seem to be.

But summits have also been venues for compromise, and it’s tough to imagine October’s being much different. Other EU officials, like Eurogroup (eurozone finance ministers) chair Jean-Claude Juncker, have suggested they’re willing to be flexible, provided Greece demonstrates commitment to public-sector cuts and economic reforms. And Greece, despite plodding progress, appears committed. Samaras has got his coalition to agree on another €11.5 billion in spending cuts, and during his publicity tour of France and Germany this week, he vowed to accelerate the privatization program (and potentially, sell Greece’s uninhabited islets). Samaras is merely requesting “breathing room”—an extra two years to implement those €11.5 billion in cuts so the economic impact could be spread out a bit, with the private sector perhaps starting to produce more in the meantime. That’s something recession-weary Greeks would no doubt welcome—something Merkel seemed sympathetic to Thursday, saying, “I will encourage Greece to stick to the reform path, even though it has demanded a great deal from the people in Greece.”

On balance, Merkel and the rest of Europe’s leaders appear to understand that, after three years of spending political and physical capital to keep Greece in the eurozone, letting it Grexit now wouldn’t make much sense. Those who suggest Greece should leave are outliers—in the EU and their respective governments. Those with more say, like Merkel, Juncker and French President François Hollande, may keep giving Greece some tough love, but their steadfast will to prevent the euro’s disorderly unwinding likely prevails.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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