Eurozone semantics: yes, no, jein…

For a nation famed for precision and definitive positions, it might be almost reassuring to know that Germany has a word that combines “yes” (ja) and “no”, (nein) to mean, well, “yes-no”: jein.

But sometimes, you have to wonder…

Take for example, two contrasting reports in the Thursday editions of the FT and the Daily Telegraph on Germany’s stance over the possibility of expanding the €440bn eurozone bail-out fund, the European Financial Stability Facility (EFSF).

From Thursday’s FT:

Germany backs wider rescue fund role
Germany is backing proposals to give new powers and lending capacity to the €440bn ($577bn) eurozone rescue fund, even if that means increasing its financial guarantees, according to people familiar with the issue in Berlin and Brussels.

And this, on the same day, from the Telegraph:

France, Germany veto increase in EU rescue fund
Germany and France have rejected calls by Brussels for a rapid increase in the size and powers of the EU’s rescue machinery, once again exposing serious differences at the heart of monetary union.

Either some eurozone officials, somewhere, are lying, or some reporters have got their jahs, ouis, neins and nons mixed up, or — more likely — heated discussions taking place in Berlin, Paris and Brussels are giving some officials some very different impressions.

Indeed, as Hong Kong-based research house Gavekal puts it in a client note on Thursday:

One of the best TV shows ever produced has to be the British series “Yes Minister,” in one episode of which career bureaucrat Sir Humphrey tells Minister Jim Hacker that ‘you can never be certain that something will happen until the government denies it’.

With that in mind, Angela Merkel’s promise [on Wednesday] that Germany will do ‘whatever it takes’ to save the euro sounds somewhat hollow. For example, will Germany accept a structural inflation rate of 5% or above, thereby allowing Europe’s southern nations to become competitive against the European economic behemoth? Failing that, will Germany accept open-ended large, and growing, fiscal transfers to compensate for the productivity growth difference?

And if the answer to both of these questions is a resounding ‘No” (as every public opinion poll in Germany seems to suggest), then what is the ‘whatever it takes’ that Mrs Merkel is referring to? Maybe it is 50% youth unemployment in Spain? Or ever falling asset prices in Italy? Or repeated riots in the streets of Athens??

Marc Ostwald of Monument Securities, quoted by the Telegraph, said the confusion over the bail-out fund is a reminder of the eurozone’s political limits:

“We have gone nowhere since the show of unity in December. ‘Mr Market’ is still saying to EU leaders they must come up with a mechanism to transfer money from the rich core to the periphery. We are no closer to that”.

Perhaps the moment of truth will have to wait until next month’s EU summit, when leaders are expected to endorse — or quelle horreur, reject — proposals to expand the EFSF.

Interestingly, Lex picks up on other striking oddities in the eurozone debate so far, noting on Thursday:

Some investor behaviour is passing strange. Portugal on Wednesday raised €1.25bn in the bond markets and investors rushed to buy the shares of European banks. Behavioural economists (not to mention psychologists) will have fun working that one out.

José Sócrates, Portugal’s prime minister, said the auction was “a success from any angle”, as Bloomberg reports. But, well, says Lex, it’s more like “from one angle: with your back to the wall staring down the barrel of a gun.”

True, Lisbon’s 10-year paper is not more expensive now than it was three months ago, though the 6.7 per cent yield looks uncomfortably high. Lex continues:

But its three-year paper is certainly pricier: it yields 135 basis points more than in a similar auction in October – to secure just €650m of funding. That represents a sharp rise in the medium-term risk of owning Portuguese bonds.

Viewed in that context, Wednesday’s surge in European banking shares “looks bizarre”. If however, eurozone members can sort out their glaring differences over the EFSF and expand the fund as well as enhance its flexibility, it would improve Europe’s institutional ability to address the crisis, especially if the vehicles provide cheaper funding for borrowers.

The danger, in Lex’s view, is that the suggested policy shift — proposed by the European Commission’s economic chief Olli Rehn — is “over-interpreted”. And that, it concludes, would be “a very costly mistake for investors to make”, given the eurozone’s shambolic co-ordination during the sovereign debt crisis so far.

Indeed, as FT Alphaville asked earlier, would any of this be enough to finally stop the rot in the eurozone?

Jein

Related links:
In-depth: Euro in crisis – FT.com
Adventures in Portugese bond shorts - FT
Portugal bond auction fails to quell fears - WSJ
No more excuses for the eurozone – FT

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