Agenda: Germany Prepares For Crucial Bailout Vote
Video Transcript:
Germany's government will shortly determine whether the European's latest $155 billion rescue package for Greece can go ahead. Chancellor Angela Merkel is campaigning vigorously for support, but Vice President of Analysis Peter Zeihan says the consequences of a 'no' vote will be dire.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
Colin: On the Agenda this week are the actions and words of two women leaders. The IMF's [International Monetary Fund] new chief, Christine Lagarde, saying Europe's banks need urgent recapitalization. That is code for telling us there is a big problem. Then, the leader of Europe's most powerful economy, Germany's chancellor Angela Merkel. She's on the road campaigning for support in a crucial vote in the nation's parliament, the Bundestag. This vote will determine whether Germany will back the latest Greek bailout, one that includes $155 billion in new loans as well as a commitment from Europe's leaders to back Athens until it is strong enough to return to the financial markets, and who knows when that will be.
This is STRATFOR's agenda, and joining me to discuss this core issue, I welcome back Peter Zeihan. Peter, will the Bundestag back Merkel? And what happens if it does not?
Peter: The German population is a little skittish on what is going on with the eurozone debt situation right now and something that the German government has yet to do is sit down, address the population, explain exactly what is at stake and why the Germans are doing, why the German government is doing what it is doing. The problem is you cannot have that conversation in modern Germany. Ultimately the eurozone debt package, this EFSF-2 as it is being called, is about making sure that Germany has full control over the bailout mechanics. This is to give Germany the type of political control that they have sought for the last three hundred years of European history. How do Germans have a public conversation with themselves about dominating Europe? That is a problem.
And so Merkel is forced to talk about airy concepts such as European unity and fiduciary responsibility without actually getting to the real issue, and that is difficult to convince the voters on, particularly in her own party. The most opposition that we have seen within the German system to Merkel's platform is coming from within her own Christian Democrats, and this is why Merkel has been forced to cancel a couple of foreign trips, including one to Russia, and this is why the date for the debate in the Bundestag has been pushed back three weeks to Sept. 29.
Colin: And the Germans are not very receptive to the idea of helping their neighbors because they do not think the neighbors are doing enough to help themselves.
Peter: Well certainly, and unfortunately it is worse than just an issue of will. If the Greeks were actually willing to give it the full try, that is one thing, but the Greeks actually cannot. A lot of the Southern European states, most notably Portugal, Spain, and Greece, are simply not capable of the levels of low inflationary growth that northern Europe is. Their territory just is not amenable to it. In Germany you've got navigable rivers, you've got a good coastline, and you've got large tracts of flat land all in one piece in the northern half of the country. This is prime territory for developing a successful nation and a successful economy.
Greece is anything but. It is small, isolated enclaves, hard up on the sea, hard up on the mountains. There is no economies of scale to be gotten, there is no large population centers. You simply cannot have the same sort of monetary policy and tax-and-spend policies that you've got in Germany, apply them to Greece, and have success.
Colin: But that is what Merkel is saying, she is saying that those who receive help will have to commit to budget cuts and that the eurozone needs to move away from being a debt union.
Peter: Yeah, you are not going to see that work. The Germans may have the political and financial muscle to force through this round of changes but even if this buys them another year or two, it does not get past the single fact that if you put these types of policies in place in someplace like Greece you are condemning it to no growth for the future, for not just one year or two years but for pretty much forever. And that is before you take into account private debt, banking instability or poor demographics.
Colin: So, to come back to my original question, what happens if the Bundestag votes the package down?
Peter: If the Germans have a public break with the European Union on this issue, then you are talking about a shattering of German, European and global confidence in the eurozone itself. That would mean that all of the concerns that anyone has happened to harbor over the last year and a half since this started will all come boiling up and encounter one hard fact: that the Germans are not willing to bail out the system. If that happens, it is the end of this German government and it is the end of the eurozone, period.
Colin: In your opinion, what are the chances of that happening? It is a tough call.
Peter: At present I would say there is about a two in three chance that this is going to pass through the Bundestag without a major problem. But in that other one in three there is still hope, because the Socialists and the Greens who were in opposition are broadly in favor of the reform package, so they might actually be able to save Merkel's government, ironically.
Colin: And if you are right, if it passes, then won't we be entering just another eternal circle- another package will emerge, it might not work, trying something else, and on we go?
Peter: The EFSF changes that are a part of this package are sufficient. They do provide the legal precedents and authority for the fund in order to go through and preemptively make bailouts, also in banking sectors. It is a good package for Germany, there is no argument there. However it is not big enough, so we are going to have to come back to this exact same issue in 3, 6, 9 months when the fund has basically exhausted itself. It could probably handle Spain right now but it cannot handle Belgium, it cannot handle Italy, so we are going to have to come back to this and increase the size of the fund, probably by a factor of five, and then we have just got to go through this whole process all over again.
Colin: And Peter, while this has been going on, the new IMF chief, Christine Lagarde, has opened a can of worms by appearing to cast doubts on the whole stability of Europe's banks.
Peter: Lagarde just said what everybody has been thinking for some time, that European banks are not nearly as stable as they look, and she is absolutely right. And being the former French finance minister she is certainly in a position to know. But the Germans right now do not want anyone to say anything that does anything but impose confidence on the system, which is why this next month is going to be so interesting, because we are going to get to watch the Germans debate with themselves the merits of this program without actually discussing why they are doing it. It is going to confuse the hell out of everybody who is watching and markets are in for one horrible ride in the next three weeks.
Colin: Peter, thank you. Peter Zeihan, there, ending Agenda for this week. I am Colin Chapman, thanks for being with me today. Bye for now.
