The race against time to save the euro has now seriously started. The dismal bund auction last week, the Italian interest rates now stuck above 7% and the Spanish ones close to those levels, despite new elected and non-elected “technocratic” governments, the spread between German and French bonds widening to levels last seen in the early 1990s and Moody’s announcing that even Germany is not safe from downgrade: all this point to the endgame.
Famous British editorialists are becoming almost hysterical. Wolfgang Münchau writes in the Financial Times of Monday 28 November: “The Eurozone has 10 days at most.” Ambrose Evans-Pritchard tops it the same day in the Daily Telegraph: “What we know for certain is that Europe’s current policy settings must lead ineluctably to ruin and perhaps to fascism. Nothing can be worse.” The German newsmagazine Spiegel runs its cover with a broken one euro coin in front of a gloomy dark sky asking: “What now?”
New solutions leaked during last week-end and likely on the table at the next European summit on 9 December, like the introduction of Eurobonds for a “core Eurozone” or the involvement of the International Monetary Fund to channel European Central Bank funding are too complex and too cumbersome in an environment, where market participants are asking for quick fixes involving the ECB.
… and then there is the huge Damocles sword over the Eurozone: the possibility of a rating downgrade of France, losing its AAA. This event would precipitate the euro crisis in a completely new dimension.
Not that this downgrade is unexpected. It is not a black swan. Currently we are forecasting that France will lose its top rating within the next two years. With French interest rates rising quickly, it could happen sooner rather than later. However, if it would happen before May 2012, i.e. before the Presidential elections in France, then France’s reaction is likely to become a 180 turnaround from the policy followed so far. This is for me the French swan.
Nicolas Sarkozy the incumbent President will run again and despite current rather weak poll numbers he has a fair chance to get reelected given that he is an excellent campaigner. His campaign will run on two axes: 1) law and order and 2) economic and fiscal responsibility. France losing the AAA rating would seriously tarnish the fiscal responsibility narrative and would certainly be used by Mr. Sarkozy’s rivals. They are already now pointing to the fact that under his Presidency France’s debt increased by 500 billion euros.
In my view after a first outraged reaction bashing markets and rating agencies in the same vein US President Obama reacted after the US lost its AAA, the French government might well take the stance of becoming the defender of the Mediterranean countries instead of shadowing Germany, as it does now.
A rift between Germany and France is very likely to become the beginning of the end of the euro crisis. Either with France’s weight the supposedly “weak” countries get then at least some relief from the European Central Bank or under French leadership they might consider other options leaving Germany alone with his strong euro, its psycho rigid European Central Bank and a deep recession. The French swan could well be the one singing the demise of the euro.
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