Hollande decisively rebuffs Merkel’s and Rehn’s austerity policies

From left to right, in the 1st row: Dalia Grybauskaitė, President of Lithuania, François Hollande, President of France, José Manuel Barroso President of EC and Antonis Samaras, Greek Prime Minister. In the 2nd row: Pedro Passos Coelho, Portuguese Prime Minister, Angela Merkel, German Chancellor, Jyrki Katainen, Finnish Prime Minister, and Werner Faymann, Austrian Federal Chancellor. (EC Audiovisual Service).

European Commissioner Ollie Rehn, of Finnish origin (not finished, at least not yet), who has become the EU’s champion of austerity, will find it increasingly difficult to defend his Castle of Miser over the coming months. Yesterday, speaking in an interview to a daily newspaper of his country (on demand?), he playfully unleashed thunders against the Nobel laureate American economist Paul Krugman, who had briefly demolish with an article Rehn’s austerity theorising. The exchange was over the reasons why the risk premiums on Italian and Spanish debt have substantially decreased during the past few months. This interview appeared in yesterday’s morning issue of “Helsingin Sanomat”, for Rehn to read and enjoy.

However good things don’t last much and there came the French President, Francois Hollande to destroy Rehn’s happy morning moments. The French leader tastefully announced from Dijon, for everybody from Berlin to Brussels to hear, that the 2013 deficit of his government’s budget will not be less than 3%, as he had predicted some months ago, but around 4.5% of the GDP. As everybody knows, a less than 3% government deficit is Rehn’s, Berlin inspired economic policy recipe for Eurozone, to…prosper after ten years, when the sovereign debt would be reduced to around 60% of the GDP.

Incidentally the Finns who still support the German economic policy mix, are the last to do so, given that the Dutch and the Austrians have already abandoned Berlin’s miserable platform. Now what about this one Finn? As long as Paul Krugman is the enemy, it is easy for Rehn to contradict loudly and feel happy. No risks in that. When it comes to the French President however, things are totally different. For one thing it’s not Rehn’s call, to comment on Hollande’s announcements.

Obviously, the French ‘missile’ launched from Dijon against Berlin didn’t contain Mustard Gas. It was however full of French decisiveness and probably aggressiveness, aimed at putting an end to the German plans for Eurozone. Probably the French had read Krugman’s article, destroying Rehn’s and Merkel’s austerity straight jacket.

What the American economist said, was simply that the  unsustainably high risk premiums of last summer on the Italian and the Spanish sovereign borrowing, didn’t shrink because of Rehn’s and Merkel’s austerity policies, but simply it was the result of ECB’s September 2012 announcement of the famous Outright Monetary Transactions (OMT) possibility. To be reminded that last September, in view of the unsustainable interest rates levels on the Italian and the Spanish sovereign debt, the European Central Bank was forced to announce this OMT programme. According to it, the ECB would intervene in the secondary capital markets, with unlimited resources to buy Italian and Spanish bonds, in order to restore their interest rates, their prices and their yields at sustainable levels.

As it was proved during the past few months, this ECB step was so successful, that the central bank managed to reduce the borrowing cost of Italy and Spain to logical levels, without spending one euro! The ‘money sharks who had come out to profiteer from Eurozone’s sovereign debt backed off and let interest rates, risk premiums and yields to subside. This was the direct outcome of the fact that ECB could print unlimited quantities of euros, to buy back unlimited quantities of Eurozone sovereign debt and easily drive the speculators out of business.

Undoubtedly the OMT was the reason why Eurozone’s sovereign debt market stabilised at lower interest levels and not Merkel’s and Rehn’s austerity programmes. Krugman is not the only economist to say that. The American though became sarcastic by telling the Commissioner that those austerity policies, which have driven half of Eurozone to a deep recession, have the opposite effect, reducing the ability of all those countries’ to pay back their debts and thus increasing risk premiums and interest rate costs. Is it difficult to understand or is there something else in some Teutonic minds? The second option is already a reality. The Sting has concluded that there is a German complot developing in front of us.

Olie Rehn, with his ‘ideological’ insistence on austerity is shamelessly siding with the Germans in their effort to bring most of the Eurozone countries to their knees. Why? Apparently for Berlin to buy their assets cheaply, counting on the reserves Germany has accumulated. It’s not an exaggeration to conclude then, that a real war takes place in Eurozone. In this context is not difficult to explain why the French President Francois Hollade decided yesterday to send a strong message to Brussels and Berlin that Paris is not succumbing any more to the austerity recipe.

His move is an aggressive answer to Merkel’s dictums, tantamount to a declaration that France won’t have any more of this. His announcement ‘advertising’ a priori a 4.5% budget deficit in France for 2013 at this critical moment is nothing less, than a unilateral change of rules of the game, bringing Paris in the steering wheel that Merkel is holding for a long time. Holland was greatly supported in this, by the fact that the Italian economy seems to fare well after the inconclusive election, despite the unbelievable lightness of its politicians. Draghi’s positive comments on the Italian economy last Thursday also pushed things towards this direction. It is possible that very soon we will witness a change of course, in Eurozone’s economic policies. The US too is pushing hard for that. A resumption of the European economy will undoubtedly help the US.