UPDATE: Well, that was brief! Reuters is reporting that S&P is back in sovereign-credit-downgrade mode. The agency has threatened to pull an America on the six eurozone countries currently in possession of an AAA rating — including France and Germany. We'll see how long this rally holds.
The latest surge in hope the Europe will be able to manage its debt crisis has caused the markets to rally over the past few trading sessions. However, the latest kinda sorta deal also reveals the schizophrenic situation that Germany keeps backing itself into.
On the one hand, Germany doesn't want to throw its weight behind a plan to make the eurozone work more like the U.S., where the Federal Reserve can function as the (nearly) undisputed central authority on matters monetary. On the other hand, Germany wants to call the shots of fiscal issues, compelling everyone else to act more like...Germany!
One dividing line is that the Germans, along with the Dutch and the Finns, remain adamantly opposed to what some consider the simplest solution: allowing the European Central Bank to become the euro zone’s lender of last resort and to buy sovereign bonds on the primary market, in unlimited amounts. [German Chancellor Angela] Merkel is also dead-set for now against collective debt instruments, like “eurobonds,” that would put taxpayers, particularly German ones, on the hook for the debt of others, which her government regards as illegal.
Mrs. Merkel says it is time to get the euro’s fundamentals right. She is insisting on treaty changes to promote more fiscal discipline, including a limit on budget deficits, with outside supervision and surveillance of national budgets before they become dangerous, and clear sanctions for countries that fail to adhere to the firmer rules. Berlin wants the new standards backed up by the European Court of Justice or perhaps the European Commission, with the power to reject budgets that break the rules and return them for revision.
This is really all about Germany preserving the privileges of being Germany. Be the biggest economy in Europe, but don't act like it. What's troubling here is that that Germany has had more than a decade to get the "fundamentals" of the euro right. But it hasn't wanted to deal with the responsibility of being the Big Dog.
Germany wants to lead by example, rather than by action. Why become entangled in a ECB version of the Fed's "quantitative easing" bond purchases when it can counsel austerity for countries such as Greece, Italy, and Spain as the penalty for not developing powerhouse, export-driven economies?
It's starting to look like the euro will survive. But it's not clear that it will be much of a party to be allowed to stay in the single currency, when you're a southern European country, if Germany continues to simultaneously demand action from others while avoiding action itself.