by Marc Chandler
My articles My offerMy siteAbout meMy videosMy books
Follow on:LinkedINTwitterSeeking AlphaAmazon
With the ECB poised to take additional steps down the unorthodox monetary policy route, financial and economic forces are as potent as ever. However, there is a subtle shift taking place that few seem to recognize. It is the re-emergence of non-economic/non-financial issues.
Since the Great Financial Crisis began, and especially since the emergence of the European debt problems, economics have been paramount in Europe. Even political developments were understood in relation to the economic and financial problems.
The refugee challenge began the new dynamic, and it was augmented dramatically by the terrorist attack in Paris. Political considerations have moved into ascendancy, and it will likely have far-reaching implications. When the dominant issue is economics, Germany holds sway. The re-emergence of political issues, however, illustrates the one-dimension of Germany's leadership. Perhaps one of the reasons it does not act as a hegemon (putting long-term strategic goals ahead of narrow short-run self-interest) is that it is not really. It is simply a large dominant economic power. As Kissinger once quipped, "Pity Germany. Too big for Europe and too small for the world."
France has been unable to keep up with Germany's economy prowess. This is the heart of the governance challenge within Europe. France was too uncompetitive to fully express the interests of the debtors in Europe, and this allowed the creditors, led by Germany, to largely drive the policy response to the debt crisis.
However, the war against ISIS has not changed the underlying economic situation, but it has changed the political situation. Hollande has driven home this point by declaring that the security pact trumps the stability pact. France has not met is budget targets since 2007, and has been given several rounds of forbearance. The Dutch Finance Minister and Eurogroup head Dijsselbloem, who was so firm about Greece, now say that France's fiscal efforts are "broadly compliant" with EU.
Reports suggest that Hollande's first call to rally support after the attack was not to Merkel in Germany but to Cameron in the UK. He invoked the European Union's military assistance program and bypassed the EU's central bureaucracy that was so important in the economic and financial crisis and went to the individual national capitals directly.
Hollande called on Putin yesterday and called for a broad coalition to fight terrorism. It seems impossible for Russia to join a 'broad coalition" that would include joint command and shared intelligence. However, France's overture may be important Europe, for the most part, seemed more reluctant than the US to introduce and continue to ratchet up sanctions.
Asymmetrical threat perceptions and closer commercial ties likely explain the difference. There has already been some push against further isolating Russia by Italy and Germany. At the end of January, the current sanction regime is set to expire. It is not clear at this juncture whether the political will to renew the sanctions exist. Just like the security pact takes precedence over the stability pact, so too may the war on ISIS trump Russia's actions in Ukraine (Moldova, Georgia, and its repeated incursions into other countries' airspace and waters).
France holds regional elections on December 6, with run-offs on December 13. After the October 31 attack, we thought it would offer Hollande a chance to re-launch his beleaguered presidency. How the Socialists do will test this hypothesis. At the same time, our more general point, that the emergence of non-economic issues represents a new phase in the evolution of Europe, and reveals the limitations German power in a way that seemed unthinkable a few short months ago.
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
Tags:
