I was a little surprised to hear the statements by Jean-Claude Trichet this morning. In essence, it sounds like he is in total denial over the situation that is unfolding in Europe. Trichet says the surrounding nations are not in danger of default. While it might be true that they are in a less dire financial situation I think Mr. Trichet is underestimating the pressure that higher rates and continuing budget cuts will impose on these nations. Remember, this is a CURRENCY problem that can only truly be fixed by total dissolution of the EMU. Until then, there will always be deficit nations that are subservient to Germany’s surplus.
I’m going to speculate here a little bit, but Trichet said in this morning’s testimony that they had not even discussed the option of buying bonds on the secondary market, i.e., implementing quantitative easing. Trichet said:
“We did not discuss this option”
I find this more than hard to believe. In a later statement Trichet said:
“we’re inflexibly attached to price stability.”
My guess is that Trichet has indeed raised the prospect of buying bonds with the Germans and they have put their foot down. As I’ve previously said, this last resort was going to be a very difficult sell to the Germans. This would be a bold move from the Germans. I have to be wondering if they understand how broken the EMU truly is now and they must be questioning their membership. This is a long-term positive, however, as the Germans might surely be waking up to the problems in the EMU.
As for Trichet, it appears as he is still clueless with regards to the vast differences between the EMU and a truly non-convertible floating exchange rate currency system. He has called for a full fledged backing of the Greek bailout and continued focus on budget deficit cutting. What Trichet doesn’t seem to understand is that continued deficit cutting is likely to drive Greece into recession and perhaps even depression. Tax receipts dive, interest rates remain high, deficit increases. Default is looking more and more like the only option. There is no doubt in my mind now that defection is the best option for Greece. It’s a true shame that people are dying and the government is so unwilling to listen to the people. While the populace might not understand the workings of the monetary system in the EMU they do understand the grave injustice that is being imposed on them.
In sum, it looks like Trichet accomplished a whole lot of nothing at this meeting. Greece could get their bailout, it will not solve the problem, the markets will look beyond Greece to Portugal, Italy, Spain and Ireland, the Euro will continue to crash and the equity markets will continue to fall. This is getting worse by the second.
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