As the Euro zone wobbles in debt and austerity crises that ebb now and then but return with fury, it is evident that the real determiners of the fate of the tottering continent are investors rather than governments.
The most recent round of Euro-panic, centred on fears of sovereign default by Ireland, was unleashed by one brief statement of the German Chancellor, Angela Merkel. Anxious to avoid being pilloried by German voters as a transferrer of wealth from her own taxpayers to delinquent European spendthrifts, she asked private investors to contribute to the costs of bailouts of distressed European economies. Throwing down the gauntlet at market forces, she added that such an equitable sharing of burdens between solvent states like Germany and “those who earn money” in credit markets was necessary to establish “the primacy of politics” and “the limits of markets”.
The comments immediately sent bondholders into jittery huddles and triggered a fresh round of lending rate hikes for Ireland, Portugal, Spain, Italy and even Belgium.
Investors responded to Merkel’s attempt to offload some liabilities from the shoulders of the German people with decisive collective action that raised borrowing costs for debt-plagued European governments. Yield spreads between Irish and German debt rose to Euro-lifetime highs and the betting game about when and by how much the European Central Bank (ECB) will step in to save Ireland started in earnest.
That investors hold all the cards on making or unmaking the Euro zone’s recovery from its worst economic meltdown is now crystal clear. Merkel herself was forced to back down just a couple of days after her bravado-laced comments, as she issued conciliatory “clarifications” that the idea was not to leave bond holders on the hook for current crises but to establish a principle of shared responsibility for “future bailouts”. But the horses had bolted by then and the investor community has since jacked up pressures to teach fragile European economies and their healthier peers a lesson.
The language that bond markets are now using to tame harried European macroeconomic policymakers is quite instructive of the power shift away from states and into the