Thursday, 30 August 2012

Eurozone debt crisis: barely enough, barely in time


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Italian-German relationships have a tortuous history. An early incident was in 9AD, when three Roman Legions were lost in the forests of Northern Germany, an event so shocking at the time that the Emperor Augustus is alleged to have stood, butting his head against the wall of his palace, repeatedly shouting “Give me back my legions”. It marked the effective end of Roman expansion into Northern Europe with, perhaps, profound implications even today. A series of Germanic invasions in the fifth century brought down the curtain on the Roman Empire, with the final emperor, Romulus Augustus, forced to abdicate in AD476.   

Charlemagne managed to unite the Teutonic and Latin worlds briefly, but, following his death in 814 the division of his empire between his sons marked a pretty definitive demarcation between Germany and the former Roman Empire, both linguistically and culturally.  Frederick Barbarossa, Holy Roman Emperor in the twelfth century, spent a great deal of his thirty five year reign in a series of ultimately futile attempts to bring an increasingly self assertive northern Italy to heel. This, too, it can be argued had profound implications as the new states, freed of the constraints imposed by feudalism, entered a rich and creative period of development. Italian politics for centuries was dominated by the bloody struggle between the popes and the German Holy Roman Emperors. In the 17th Century, along with most of Central Europe, Italy and Germany were ravaged by the Thirty Years War, seriously decreasing the populations of both countries and bankrupting the participants. We will move swiftly over the attempted co-operation during the twentieth century.

It is against this background that the European Central Bank, led by Mario Draghi, is attempting to draft plans to intervene in sovereign bond markets which are expected to be revealed next week. In this, he would appear to have the support of Angela Merkel, but seems to be having considerably more difficulty in persuading the Bundesbank. Meanwhile, the clock carries on ticking ever louder, with Catalonia the latest Spanish region to request help. As the FT reported today, representatives from each of the seventeen national banks that make up the eurozone have been trying to reach an accord over much of the last month, but it appears that any consensus is still some way off. Italian and Spanish bond yields are still well below the crisis levels seen in July, but remain extremely volatile and vulnerable to any short term negative sentiment. However, as we have said before, the European crisis has been characterised by a series of changes that have been “just about enough, just about in time” (or perhaps that should be “barely enough, barely in time”). Let us hope that the key relationship at the moment – that between Mario Draghi and Jens Weidmann, the head of the Bundesbank – looks less to the past and more to the future.

Rob Burgeman
Divisional Director

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