Submitted by
Sizemore
Investment Letter
as part of our
contributors
program
It's
all
about Europe. With earnings season largely over and the United
States distracted by the upcoming presidential election, the only
news likely to move the markets over the next month will be coming
out of Europe.
Late this week, the European Central Bank will be having a press
conference that many market watchers hope will shed a little light
on ECB President Mario Draghi's long-delayed bond purchase program.
And less than a week later, Germany's constitutional court is
scheduled to deliver a ruling that could single-handedly torpedo
the entire European project.
Like it or not, the fate of the world economy depends on a
ragtag collection of technocrats, politicians, and wonkish legal
experts. As heroes go, they are not quite on par with the Avengers
or the Super Friends, but they are unfortunately all we have.
Let's take a look at the major players and the roles they have
to play in the weeks ahead.
#1. Mario Draghi, European Central Bank
President
The man who claimed he would "do whatever it takes" to save the
euro and stated with rhetorical flourish, "believe me, it will be
enough," is the single most important person right now in the
Eurozone crisis. As the guardian of the ECB's proverbial printing
press, he's the only person with a big enough "bazooka" to blast
confidence back into the market.
The buoyancy in global equity and bond markets over the past two
months is largely a bet that Draghi will deliver on his promise.
You can bet that every sentence in his Thursday press conference
will be picked apart with a fine-tooth comb for clues as to his
plans.
The growing consensus, based on comments by Draghi and others,
is that the ECB will buy virtually unlimited amounts of
troubled-country bonds in the secondary markets once the countries
in question formally request aid from the Eurozone bailout funds
and submit to any conditions for reform or budget austerity (even
if some of the conditions are symbolic).
#2. Jens Weidmann, President of the Bundesbank
But Mr. Draghi will not use a single euro to buy periphery country
debt if Jens Wiedmann has anything to say about it.
Weidmann is president of the German Bundesbank, the single most
powerful national bank within the Eurozone system, and a leading
member of the ECB's governing council. He's also the most vocal
high-profile critic of Draghi's bond-buying plans, arguing that
such operations are an illegal funding of member states' budgets
and a major overstepping of the ECB's mandate.
Sure, Mario Draghi
can
act over Weidmann's opposition. But given the Bundesbank's
influence within the system, it won't be particularly fun or easy.
Much of Draghi's stalling in recent months has been due to his need
to get the Bundesbank on board. His success or failure on this
count remains to be seen.
#3. Angela Merkel, German Chancellor
Next on the list is Germany's iron lady, Chancellor Angela Merkel.
As the elected leader of the most powerful economy in the
Eurozone-and the one country strong enough to backstop the assorted
bailout schemes-Merkel is second only to Draghi in importance to
the Eurozone right now.
Ms. Merkel has two very different voices whispering into her
ear. From one side, she hears the pleas of her fellow European
heads of government asking for assistance in the cause of the
greater European good. But from the other side she has the stern
voice of German Finance Minister Wolfgang Schäuble demanding
austerity as both a means to an end and the end itself.
The result has been predictable: paralysis and indecision.
Merkel's heart tells her to support Draghi's attempts to do
"whatever it takes" while her conscience-and her angry voters-tells
her that this only rewards bad behavior and that the only force
that will incentivize Europe's problem states to get their acts
together is the constant threat of bond-market meltdown.
As an elected political leader (rather than an appointed
technocrat like Draghi and Weidmann), Merkel has a responsibility
to explain to her citizens what is at stake, and on this count she
has most assuredly failed. The sooner the chancellor learns how to
actually lead rather than follow the often contradictory whims of
her voters, the sooner we will be to finding an end to this
crisis.
#4. Mariano Rajoy, Spanish Prime Minister
After campaigning for the job for three election cycles, one might
wonder if Mr. Rajoy regrets taking the job of prime minister. It
has, no doubt, proven to be a thankless one. With roughly a quarter
of the Spanish population out of work and forced government
spending cuts starting to bite, Mariano Rajoy is not a popular man
in his home country.
As the leader of the country currently at the center of the
crisis, Rajoy is one of the key players. But unlike his German
counterpart Angela Merkel, Rajoy is not in much of a position to
actually act at the moment. He deserves credit for forcing through
deeply unpopular austerity measures and negotiating quite favorable
terms in the initial stages of the bank bailout talks. But in the
end, his country's fate lies in the hands of the ECB and
Germany.
The key question for Rajoy will be if (or more likely when) he
will formally request a state bailout. The delicate negotiations
that follow will determine whether Spain and the Eurozone are
stabilized or whether the entire system rips apart at the seams. We
shall certainly see whether the mild-mannered Rajoy is up to the
task.
#5. Andreas Voßkuhle, President of the German Federal
Constitutional Court
Most readers will have never heard of Andreas Voßkuhle, and if
there are no major complications on September 12, he may remain all
but anonymous for the rest of his life, at least outside of
Germany. But if his becomes a household name, you will know that
something went terribly, terribly wrong.
September 12 is the date on which the German court will decide
whether Germany's participation in the Eurozone bailout facilities
is legal under Germany's constitution, known as the "Basic Law"
(see
"What Keeps Me Awake at Night"
).
Most observers expect the court to more or less toe Angela
Merkel's line and acquiesce to the Eurozone bailout facilities,
with perhaps a few conditions and caveats added in for good
measure.
But if Mr. Voßkuhle and his fellow judges rule that German
participation is unconstitutional, then two years' worth of painful
negotiations go out the window and we go back to square one. I
would see a global meltdown on par with post-Lehman 2008 as being
virtually guaranteed at that point, and I do not believe that the
euro would survive in any form that we would recognize.
I doubt whether Mr. Voßkuhle wants that on his conscience, and I
am betting that the court rules favorably. But you can bet that
I'll be sitting on the edge of my chair when the ruling is
announced.
SUBSCRIBE
to
Sizemore Insights
via e-mail today.