ONCE again Germany has ignored the golden rule of markets – they should never be spooked. So be it but on the day the German Chancellor made some politically challenging remarks on the future of the euro that removed any thought of secretly wanting out of the currency, why on earth did Angela Merkel choose the same day to announce a ban on naked short selling, insisting Germany would introduce its own financial transaction tax or levy even if other EU states refused?
If timing is everything then this latest declaration of intent from Germany was not exactly brilliant – tantamount to throwing the remainder of her toys from the pram in a move that hit not only German but all European and international financial markets. All the 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 Merkel is the butt of jokes such as the suggestion she’s also banned scoring against Germany at the World Cup and that German regulator BaFin has ruled computers must be swapped for pencils and securities in Germany may now only be traded in physical form on the floor of the exchange.
I jest of course on an otherwise serious matter. In the German parliament 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.
Whether the euro would survive a German-led assault to garner complete EU-wide control of market regulation and of member states’ budgets plus all the likely restrictions has to be doubted. By taking such a heavy handed approach on several fronts all the unfortunate Chancellor has done is to make the survival battle for the euro even worse. In the process Merkel has unwittingly destroyed a little more of the most important ingredient of markets – trust. At least some of what she is reported to have said is commendable. For instance, pointing out the euro is in great danger is certainly a frank admission of currency weakness from any German head of state in living memory.
So too is the suggestion 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.
To back up the calls for increased regulation and control Merkel has been pushing more ridiculous views such as blaming the earlier financial market crisis and bail outs solely on the banks while ignoring the profligate spending by EU governments that sparked the current sovereign debt crisis. You do wonder whether Merkel has any idea of the crucial importance of the banks to the future of the Europe wide economy. Does she not realise strangling banks, hedge funds and other financial institutions in Europe with greater levels of regulation and operating restrictions plays into the hands of other markets such as New York, Tokyo and Shanghai?
Neither Merkel nor any other EU political leader will ever change the resolve of markets, but never forget the one power they do have is to destroy them. Howard Wheeldon is the Senior Strategist at BGC Partners.