Once again Germany has ignored the golden rule of markets – they should never be spooked! So be it but on the very day that the German Chancellor made some politically challenging remarks on the future of the Euro that remove any thought of secretly wanting out of the Euro why on earth did Angela Merkel choose the very same day to announce a ban on naked short selling and said that it would introduce its own financial transaction tax or levy if other EU member states refused?
If timing is everything then the timing of this latest declaration of intent from Germany was not exactly brilliant! Tantamount to throwing the remainder of her toys from of the pram in a move that hit not only German but all European and international financial markets today it seems to me that all the German Chancellor has managed to do by this affront to market integrity is succeed in fuelling more fears that the European sovereign debt crisis may just be even worse that it looks.
No wonder then that Mrs. Merkel is the butt of many jokes today such as the suggestion that she has also banned scoring against Germany at the World Cup and that the German regulatory body BaFin has ruled that computers must be swapped for pencils and that securities in Germany may now only be traded in physical form on the floor of the exchange. I jest of course on an otherwise very serious matter. In the German parliament today Mrs. Merkel uses stark language describing the current Euozone crisis “if the Euro fails, then Europe fails” that “Europe faces its biggest test in decades” and that this [crisis] is “no more and no less about the preservation of the European ideal”. I can agree with just about all of this but it seems to me that the reality of the latest outburst on naked short selling is no less than the German Chancellor setting the stage in which German word in Europe and particularly on future regulation will be law.
If then this is a power struggle between Germany and say France over regulation and of who will lead the battle for Euro survival then all that I can say is that France might as well pack its bags and head off home. However, whether the Euro would survive a German led assault to garner complete EU wide regulatory control of financial markets regulation and indeed, of member state budgets plus all the various restrictions that would be likely then to be imposed has to be doubted!
By taking such a heavy handed manner on several fronts over the past twenty-four hours it seems to me that all the unfortunate German Chancellor has done is to actually make the ultimate survival battle for the Euro even worse! In the process she has not only undermined the Euro today but also German financial markets plus the rest of the Eurozone area and most of all, across the whole EU. In the process Mrs. Merkel has unwittingly destroyed a little more of the most important ingredient of markets – trust. To be sure, at least some of what Mrs. Merkel is reported to have said this past few hours is commendable. For instance, pointing out that the Euro is in great danger is certainly a frank admission of currency weakness from any German Chancellor in living memory. So too is the suggestion that countries that violate euro-area budget rules will in future be denied aid and even the possibility that the national budgets of EU member states might eventually be independently reviewed – watch out Greece, Ireland, Portugal, Spain, Italy, the UK and even France! Not that Germany has always been perfect in this matter of course.
On a completely different tangent it seems that to back up the calls fro increased regulation and control the German Chancellor has been pushing forward rather more ridiculous views such as push blame for the earlier financial market crisis and bail outs solely on the banks whilst completely ignoring the effect that profligate spending by EU governments that failed to obey the Maastrict budget deficit rules are the principle reason behind the current sovereign debt crisis. OK, so it took a little while for the chickens to come home to roost but when they did what a party we have seen! By the way let us not forget here that France was one of the worst offenders for disobeying the Maastrict deficit rules eight or nine years ago!
You do wonder whether Mrs. Merkel actually has any idea at all of the crucial importance that banks in Germany – indeed banks across the whole Eurozone and EU area will be to the future of the Europe wide economy! Does she not realise for instance that strangling off banks, hedge funds and other financial institutions in Europe with too greater levels of additional regulation and operating restrictions will just play into the hands of other financial markets such as New York, Tokyo and even Shanghai? Does she really want Europe to turn the clock back that far?
It seems that she does as last night without any prior warning or outward discussion with EU or Eurozone partners the German Chancellor Angela Merkel agreed a ban on naked [selling of financial instrument that in effect have not yet been borrowed] short selling on Euro government bonds and credit default swaps. The ban apparently applies to the ten leading German financial institutions until the end of March 2011. Not surprisingly the Euro took yet another big hit against the dollar and Yen overnight and again this morning as global market participants grappled to understand why the nation that is supposed to be at the heart of let alone the engine of the Euro economy should seek to restrain the largest German institutions in such a high handed and unnecessary manner.
If as I suggested earlier that the move is supposed to be part of a pre-emptive brick building exercise by the German Chancellor ahead of the Europe wide financial market regulation then all that I can say that in the manner of its handling it has already backfired. It also begs the question who on earth the German government is really aiming this move at? If it is German banks and their part I the earlier financial market crisis then all that I can say is that it is probably already a case of shutting the gate long after the horse has bolted, been recaptured and subsequently even passed away. If of course it is about fears of much worse to come from the sovereign debt crisis then all that I can say is that this is no way to handle a crisis. Meanwhile we wait to be formally told by the German regulator how the new regulations will be policed. Clearly, major German banks and institutions will suffer as a result of this ridiculous move and so too will the rest of us. And whilst on the subject of regulation and that first stage ECOFIN (the Economic and Financial Affairs Council of the EU) agreement yesterday placing more rules hedge fund operation all that I can say is that whilst I like short selling no more nor no less than anyone else and I well recognise some past faults. But I hope that I am sensible enough to know that is has not only earned but long ago fully justified a place at the table – something of course that bearing in mind the effect that this will have on the UK which largest hedge fund .
I will puzzle for a few more hours yet about motive behind the German Chancellors determination to undermine the Euro and Euro economy at this particularly difficult time? Certainly inflicting yet another knife wound in the Euro at this point on the back of a phony excuse that it assists the process of Europe wide financial regulation momentum is not going to wash. In the meantime we can at least say that neither Angela Merkel nor any other EU political leader will ever change the resolve of markets but never forget also that the one power they do have at their disposal is to destroy them.
