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110614 Markets Politics and the Euro NV

110614 Markets Politics and the Euro NV

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Published by Bruegel

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Published by: Bruegel on Oct 16, 2011
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02/06/2013

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© Bruegel 2011www.bruegel.org 
1
 
Markets, Politics and the Euro
By
Nicolas Veron
 
 June 2011
One of the most memorable quotes of the financial crisis was delivered by German Chancellor AngelaMerkel in May 2010, when she declared
that “
in a way, it is a struggle between politics and the markets. Wemust re-establish the primacy of politics over the markets.
” Though unusually stark, this formulation
echoes a widespread perception in Europe. Disorderly market movements, such as the successive
increases in Greece’s borrowing costs
, are overwhelmingly blamed by political leaders on speculators,abetted by their dubious sidekicks, the credit rating agencies.This depiction is both natural and misleading. It echoes centuries of uneasy relations between politicalleaders and financiers in both Europe and the United States, which oscillate between excessive proximityand excessive antagonism
sometimes both simultaneously. From F
riar Savonarola’s anti
-banker
revolution in Florence in 1494 to Louis XIV’s crushing of France’s finance superintendent
, Nicolas Fouquet,in 1661,
to President Andrew Jackson’s undermining of the Second Bank of the United States in 1833, this
is a running theme of Western history. At the same time, the anti-speculator rhetoric does not quite fit thefacts of the euro crisis. Bond market investors are moved by fear more than greed. The problem now is that
too few investors want to buy sovereign debt from the Eurozone periphery, and this “buyers’ strike” is
driven by economic and policy uncertainty, rather than by market manipulation at the hands of unethicalprivate-sector participants. This is not to say that the financial community is immune from conflicts of interest or reckless risk-taking, but only that these are not at the core of the current crisis episode.But the Chan
cellor’s quip
also mirrors specific tensions inherent in the institutions of 
today’s European
Union. EU integration not only creates a supranational decision-making machinery that is structurallyhobbled by its democratic deficit. It also disempowers national leaders from levers of action on anincreasing range of issues, including most financial market policies that are now mainly governed by EUlegislation, and whose supervision will increasingly move to the recently-created European SupervisoryAuthorities. As political scientist Ivan Krastev has put it, Europe increasingly has policies without politics atthe EU level, and politics without policies at the national level. This mismatch creates an unstable, accident-prone environment.The effects are highly visible in the euro crisis. The current context puts at the center of EU decision-makinga country, Germany, whose fiscal soundness bond investors have never been seriously in doubt in livingmemory. Germany also no longer has a world-leading international financial center on its territory, as its
financial groups’
wholesale market activities have largely migrated to London. And the German bankingsystem is ridden with market distortions, idiosyncrasies and interdependencies with political structures atlocal level. As a consequence, most German policymakers lack financial crisis-management skills based ontheir own past experience. To the extent that they have a dialogue with the financial sector, their exchangesare predominantly with bankers rather than with bond investors; and these bankers have powerful specificinterests of their own, which make their advice less than neutral.
In sum, German leaders’ domestic
policy framework
and their fellow citizens’ collective memories do not
help them to meet the current challenges of managing the euro crisis. Observers of European negotiations
may argue that this is partly mitigated by France’s input, to the extent that France’s finance ministry
appears to have maintained more financial acumen, as far as sovereign debt issues are concerned at least.Perhaps this is due to relatively recent recollections of being put under heavy market pressure as during

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