The immediate sell off in the markets following the unilateral decision by Germany to introduce a short selling ban on European Sovereign debt securities as well as on 8 large German financial institutions should not come as a surprise. This reaction has both a political and technical dimension.
On the political front, one should note that the German decision was taken without consulting its partners. It is an additional example of the fragility of the solidarity among the 27 Member States of the EU and constitutes a dangerous precedent – protectionist in nature – opening the way for beggar my neighbour policies.
More fundamentally, the Chancellor seems to have put into question the historic compromise reached at the 1989 European Council Summit in Strasbourg, during which President Mitterrand, in exchange for EU support of German reunification, obtained a firm commitment of Chancellor Kohl that “Germany would be European rather than Europe, German”. This pledge was evidenced by Germany’s sacrifice of the Deutsche Mark and the participation of the Bundesbank in the European System of Central Banks controlled by the ECB. Chancellor Merkel seems to have brutally changed direction under the pressure of her public opinion and the loss of the elections in Rhineland-Westphalia. This decision cannot fail to reignite nationalist sentiment with its associated fears that European integration had – only apparently it seems - been able to overcome.
On the technical level, it is far from certain that these measures will achieve their intended purpose. If they remain limited to Germany, they will be easily circumvented. Furthermore, there will be induced negative effects: the Government bond dealers, who distribute Sovereign debt, will no longer be able to hedge their market exposure when they bid at the regular auctions and their ability to quote prices on narrow spreads will be impaired in secondary market dealings. This will increase market volatility, reduce liquidity and increase the cost of borrowing which is quite the opposite of what is intended.
As Pierre Defraigne so aptly remarked, the crisis should be used as an incentive to reinforce the economic governance of the Eurozone and the EU. Unfortunately the recent events seem to indicate that one is heading in the opposite direction.
Brussels 19th May 2010
Paul N. Goldschmidt
Director, European Commission (ret); Member of the Thomas More Institute.
Tel: +32 (02) 6475310 +33 (04) 94732015 Mob: +32 (0497) 549259