As Trichet's actions and comments have shown today, the Europeans do not possess a large list of options for dealing with the market. They have a large and varying set of economies with greatly differing growth potentials, and uncommon definitions of optimum performance. What seems like a great boon to Germany, is the bane of Greece or Spain, and vice versa. To manage these, they have the ECB, and the various pacts and agreements that they have signed over the years in order to streamline economic performance and regulations in the region. These tools have been proven to be inadequate to the task by the Greek scandal, and the subsequent disarray of the European sovereign debt market. Now that the major powers of the region hesistate about accepting the inevitable burden that they have to shoulder in order to ensure that the European project survives, traders are turning their eyes to the ECB and the bureaucrats to do something to prevent the Euro's demise, yet fail to find anything of much value.
This is not suprising. After all, Europe is old, its population is old, and the way it conducts itself is old-fashioned, rigid and conservative in comparison to the U.S., or the rising nations of the world. Right now events necessitate bold trade-offs and courageous sacrifices on the part of the Europeans, both of which naturally demand leadership and moral strength in order to be brought to life. If it were that by doing nothing the Europeans could deliver the necessary remedies for the Euro, as they did during the Iraq crisis, the Georgian Crisis, or in the course of the Israel-Palestine conflicts, they would have done so once again, and pretended afterwards that they are only being disciplined and principled by not taking action to react to market events. Unfortunately for them, this time markets demand action, and quiet a lot of it, and no amount of rhetoric, or moral pontification, which were amply provided by the ECB chief today, will satisfy them into trusting the E.U.'s future.
We are a bit surprised at the ostrich-like complacency of European authorities, as they seem to genuinely believe that by doing nothing they can wish the crisis out of existence, or by merely declaring loudly that they are "aware" of the gravity of the situation, they can somehow avert its turning into a region-wide contagion that threatens the survival of the union. On the one hand, official after official expresses his "utmost and unshakable confidence" in the future of the Eurozone and the currency, yet the same officials refute time and again the accusation, as they apparently perceive it, that they are plannning something significant enough to ensure their survival. And it is a little strange that they can at times be victims to the illusion that, after repeatedly assuring everyone that Eurozone's creditors are safe from losses and restructurings, they can make the same creditors agree to a share in the burden just out of a sense of altruism towards politicans, or from a sense of civic responsibility towards nations and economies of which they are not even citizens. In any case, markets are not renowned for charitable generosity, and the PM of Europe's largest nation should at least be aware of this much when she makes her opinion known to the rest of the world.
Today's ECB news conference has led to little more than confusion in the market which seems to be staging a rally right now after being battered over the past weeks. Mr. Trichet did not appear particularly alarmed, probably on the notion that fundamentals in the region are strong enough to withstand bond sales by frightened investors or greedy speculators. Perhaps by looking at the large budget cuts enacted by various government over the past months, and the size of the EFSF, he is assuming that any Euro breakup scenario is outlandish speculation by overexcited traders who are known to be bipolar in their behavior. But even if that were all true, he should be alert to the fact that the past three years have provided sufficient evidence that a conventional analysis of facts may not always represent the hidden and incalculable risks that lead to very surprising market behavior. Caution, and not pink glasses would serve the ECB Governor better now as he seeks to ensure the stability of his domain of responsibility.
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