A Non-Divine European Comedy

Sovereign Self-Interest Versus European Hegemony

“Markets can remain irrational longer than we can remain solvent… “

By Blain's Morning Porridge
There were moments yesterday when it felt we stood at the edge of the abyss preparing to take a giant leap forwards. The morning’s fears were palatable –the lack of market direction and escalating concerns setting us up for a tumultuous slide. By the afternoon everything rosy again! Despite miserable German confidence numbers the feared sell-off has not developed. Fear is still there tho! Fed keeping long term rates low should not be a surprise. In Europe, we’re watching how the news flow develops.
Spain – more of the same. Will they, wont they take the OMT bailout? Rumours this morning say a limited Euro 60 bln is being discussed for the banks and regions, but who knows. Spain has completed 2012 funding – so what’s the rush or the need asks the Spain DMO? Perhaps Spain signing up for reasons of “prudency” could provide the market with the kind of leg up it needs to rejuvenate the rally?

Greece is being touted as a crisis averted. If you believe all the guff from yesterday’s list of items on which there is apparent agreement: labour reforms, privatisation, new loans, etc. I shall say it quietly… we’ve heard it all before. Greece is not solved. Just delayed.  Germany saying its waiting for Troika report and IMF considering outstanding issues sounds like noise designed for domestic electoral consumption. It’s quite clear Europe is not going to let Greece go – so it’s a question of paying the minimum to keep them in the family photographs.

Apparently Draghi did a great job meeting German legislators – persuading them that far from bailing out profligate southern spendthrifts, the ECB is acting in German’s best interest by protecting them as Europe’s largest creditor. High circus I’m told! I can just imagine him as snake oil salesman.. or worse.. a bond broker! After all.. didn’t he work for…

However, it does feel the crisis is developing in some new directions. Until recently it’s been about sovereigns and banks – but now we’re seeing corporates struggle. That’s a new dimension when corporate credit spreads are so tight, but names from Peugeot, Iberdrolla, Telefonica, Nokia are now France Telecom all have doubts notched against them. S&P’s warning of further Sovereign and Corporate downgrades to come summed up the mood. As we said yesterday – global recession is a fact and its bound to increasingly impact markets. I suspect a fair amount of the new corporate supply launched over the last 2 month new Issue feeding frenzy could end up back in circulation – we’re seeing it already!

Changing tack for a moment, I’ve not seen that much critical comment on the recent French bank bailouts – they seem to have been pushed under the carpet. But they have important implications for the basis of the Europe crisis. 

There is a general consensus France had no choice but the bailout Peugeot’s finance arm PSA. Auto manufacturing is a critical part of the French State’s Industrial-Complex in terms of employment, and without a financing arm it’s questionable if it could remain so. As it is, French auto’s account for a tiny proportion of global auto demand. So compare and contrast French Auto Inc with Volkswagen.

Volkswagen managed to flog 7 mm new cars between Jan – Sept making Euro 145 bln in sales with 80% outside Germany. In the same period Peugeot managed to put only 2 mm jalopys on the roads making 45 bln in sales. Moreover while VW is watching profits soar (up 40% this year, and its increased global market share to 12%... well when was the last time your neighbour showed off his new French car? And watch what happens when VW launches its new Golf in a few weeks time. Euro 200 bln in 2013 sales looks nailed on. I aint hearing similar Va Va Voom numbers…

So why are the problems of the French car industry so important for the Euro? If French industrial policy is founded on preserving the country’s manufacturing base is that really something German/Finish/Dutch taxpayers could have been bailing out through a single European banking union. Perhaps not! From this perspective there is little difference in making political decisions to allow hairdressers to retire at 50 and political decisions to preserve manufacturing capacity to placate unions. These are national choices that illustrate sovereign self interest not European hegemony. I simply ask the question how is Europe supposed to move towards closer Union when national interest remains paramount?