The message from last week’s European Union summit: there is no more pretence.
If EU nations want to sustain a currency union with Germany, they have to implement economic and budgetary changes that bring their performance into alignment with Germany, according to Marc Ostwald, strategist at Monument Securities.
Ostwald, who is the guest host of “Squawk Box Europe” Monday, said the commitment of support for Greece coming out of Brussels at the tail end of last week shows the illusion of economic uniformity within the union.
That uniformity is now clearly far from reality and it would be foolhardy for member states to make economic sacrifices to preserve it, he said.
The stubborn stance of Germany was a victory for German Chancellor Angela Merkel’s steadfast refusal to commit any German funds to any future bailout of Greece and that underlines the new reality sweeping through the bloc, Ostwald noted.
“The new German hard line shifts the euro-zone regime a small step towards becoming a revived Deutschemark bloc,” Ostwald said. “Mrs. Merkel’s statements and actions in recent days have been received with horror elsewhere in Europe. They represent something new ...the generosity of spirit in Berlin seems to have blown away in the economic downswing, with German voters demanding that their representatives put German interests first.”
Some point to the involvement of the International Monetary Fund in the deal as a defeat for the principle of a euro-zone single economic bloc, but Ostwald said the Washington-based organisation’s participation is a boost for Merkel in that its support mechanism reduces the burden for German taxpayers.
But for Greece there remain risks and doubts, despite the commitment of support from the EU. With Greek fiscal targets dependent on falling borrowing costs in the bond markets, it may only be the appetite of bond investors to seek greater yields that bring about any downward movement in rates.
“Their budget-cutting plan assumed that the Greek government’s borrowing costs will subside to ‘normal’ levels," Ostwald said. But what is normal? The implication seems to be that “normal” is a spread around 50 basis points wider than Ireland’s cost of money-raising for 10-year paper.
Rating sovereign credits is likely to remain a hot issue in the months ahead and with investors developing a large degree of scepticism relating to government debt, an end to the Greek debt woes, backed by the EU, the IMF and most contentiously Germany, is far from assured.