Paris, Rome, Brussels and Frankfurt to confront Berlin over growth and the Athens enigma

A High-level Conference on Employment in Europe was organized in Milan by Matteo Renzi, Italian Prime Minister and President in office of the Council of the EU during the second half of 2014 (second from left). On that occasion Renzi raised his concerns about the faltering growth in Eurozone. The French President Francois Hollande (next to Renzi) took the opportunity to support the Italian prime minister’s views in the presence of the German Chancellor Angela Merkel. The President of the European Parliament Martin Schulz (first from left) and the then President of the EU Commission Manuel Barroso were also present. (EU Commission Audiovisual Services, 08/10/2014).

After the Commission’s taciturn approval of the excess deficits in the government budgets of France and Italy last October and the decision of ECB in Frankfurt to print one trillion euro two weeks ago, the ongoing arduous handling of the new Greek singularity of Alexis Tsipras by Paris and Rome may consolidate their prevalence over Berlin. Angela Merkel, the German Chancellor and her minister of Finance Wolfgang Schäuble were not able to prevent the teamwork of François Hollande and Matteo Renzi.

For some months now France cooperates ad hoc with Italy to block Germany’s grip on Eurozone’s financial steering wheel. It seems that for Paris there was no other way in order to effectively confront the Teutonic egoism of Germany, which threatens to send Eurozone back into recession and deeper deflation. Eurostat, the EU statistical service further strengthened the Paris-Rome arguments last Friday. It announced that in the euro area the annual inflation is estimated to have been -0.6% in January, down from -0.2% in December. On the contrary, Tsipras’s first week in power didn’t make the job of the duo easier in dealing with Berlin’s obstinacy. Let’s take one thing at a time.

Deeper deflation

As it turns out, inflation or rather the opposite of it, deflation, is getting worse every month. Eurostat published last Friday a frightening estimate that the consumer prices in Eurozone fell further by more than half a percentage unit in January, after crossing to the negative zone last December. Inflation has been dallying around the freezing point for many months all along the second half of 2014 but staying in the positive area. Finally it turned negative in December and it looks like it won’t stop its frightening tumbledown. There is nothing more dangerous for a stagnant economy than a negative spiral of consumer prices. ECB’s recent decision to print and distribute one trillion euro aims exactly at arresting and possibly reversing this dangerous development.

Then why does Germany insist on rejecting any efforts to wake up prices and the economy through monetary measures? Berlin strongly opposed the printing of this trillion euro by the ECB. France and Italy had a rough time to overcome Germany’s resistance. Schäuble opposed it, despite the reasonable expectation that such a release in the financial markets could help the real economy by reviving consumption and investments and thus creating some badly needed new jobs.

The precious German reserves

Presumably, if such a brighter economic scenery materializes, inflation would return to the positive part of the chart and hopefully reach the institutional target of around 2%, also reviving growth. All along this procedure, the ECB will retain interest rates pretty close to zero at their present position, until growth establishes itself. This means that real interest rates (after subtracting inflation) would become and stay negative for quite some time. Since Germany possesses huge financial reserves and is by far the largest creditor in Europe, her capital will keep losing some of its real value as long as real interest rates remain negative and inflation stays in the upper positive part of the chart.

That’s why Berlin detests an even slightly positive inflation, say close to 2%, while rates remain very close to zero. On top of that and due to the Teutonic productivity the dear euro that goes together with zero inflation doesn’t constitute a very big problem for the German exporters. Invariably such an arrangement had to be accompanied by severe austerity measures in all levels, incomes, public spending and monetary policy included. Until recently Berlin managed to keep things its way, with inflation very close to zero, interest rates as high as possible and austerity prevailing everywhere.

Not minding about the others

Obviously, Merkel and Schäuble don’t mind if the Greeks have lost 25% of their incomes, or if France risks electing a racist Madame President or if Italy and Spain risk to lose one generation of workers. This thing couldn’t last forever thank God the German arrangement started falling apart last October, when Germany proved unable to stop France and Italy from planning excessive fiscal deficits in their 2015 government budgets. Paris and Rome felt that they have had enough of Berlin’s hegemony on Eurozone’s economic policies. This was a striking deviation from the standard Paris-Berlin directorate. The next step was a series of changes in ECB’s monetary policies introduced by Mario Draghi, which culminated to the printing and buying of government bonds to help Rome, Paris and others continue borrowing cheaply. By the same token, the single European money lost almost one fifth of its foreign value, again at the expenses of Germany, because her huge euro reserves lost an equal percentage of their foreign value.

Then the Greeks came

Then came Alexis Tsipras. The new Greek government by its impertinency and extraordinary demands risks to open the appetite for similar stance by other European political parties like Podemos in Spain and Sinn Féin in Ireland. If and up to the degree the Greeks are going to succeed, similar demands will be put on the table by other non mainstream European political parties, which may win the next legislative elections. Such a prospect is unacceptable for Berlin but Paris and Rome seem ready to discuss it. Actually, Renzi and less so Hollande are pressed hard by their left-wingers within their parties to ‘do it like Tsipras’. In the former case such pressures cannot be overlooked.

This is evident also in Brussels and Frankfurt. The Commission and the ECB, the two powerful institutions of Eurozone, are showing a conciliatory attitude towards Athens, in direct contrast to Berlin’s intransigence. Answering a question in the European Parliament if the Commission accepts Tsipras’s demand to abolish the Troika of Greece’s auditors, the French Commissioner of the Economy and the euro Pierre Moscovici said that the Commission could envisage a different and more democratic arrangement.

Who is more European?

In the same line of thinking the vice-President of ECB Vítor Constâncio said that the central bank could support the liquidity of the four systemic Greek banks, and consequently of the entire country, well after the 28 February, if the Governing Council decides so. To be noted that at the end of this month expires a ‘technical’ extension of Greece’s second Memorandum of Understanding, which provides financial support in exchange of severe austerity and dishonorable exhaustive auditing of national accounts.

Theoretically, after that date the country is alone, out in the cold gust of capital markets if she doesn’t bend to the German demands. It seems then that Constâncio was indirectly dismissing this prospect and at the same time he answered the Finnish central banker Erkki Liikanen’s comment, who had said that the ECB would stop supplying the Greek financial system with liquidity after the end of February, if Greece is without a ‘programme’. Understandably Finland usually echoes Germany’s views. In this case though, the vice-President authentically conveys the opinion of ECB’s President Mario Draghi.

Confronting Germany

In short, Paris and Rome together with the EU Commission and the ECB seem ready to support Tsipras in his confrontation with Angela Merkel and the Berlin establishment. However, Athens has to mitigate its demands. The new drop of deflation deeper in the negative region in January with a -0.6% gauging notifies that recession is nearer and this fact also works in support of Greece’s positions.

All in all if Greece plays the game fairly with the EU rules it’s highly probable that it can gain more. Nevertheless, in this negotiation there are uncharted areas that may lead to accidents. But yet again all along the past five years whatever had to do with Greece was quite novel and tested the cohesion and the ability of the EU to come up with answers in difficult times. In any case the French minister of Finance Michel Sapin supported yesterday night the Greek proposal for a new ‘contract’ with the EU. This is in direct contradiction with Berlin’s position that Athens has to comply with what has been agreed so far. This development supports the view that a major confrontation is developing between Germany on the one side and everybody else on the other.