David Marsh’s weekly column published in the German business newspaper Handelsblatt and on website MarketWatch (part of Dow Jones)


Obama may now take the gloves off with Europe

JAKARTA, Indonesia (MarketWatch) — U.S. irritation with Europe’s inability to solve the euro crisis is likely to come increasingly to the fore after Barack Obama’s re-election. The U.S. president’s relatively compelling victory will have three effects on the further development of economic and monetary union (EMU), none of them positive.

First, after months in which Obama and his team have made clear that they want Greece to stay in the euro to prevent a damaging pre-election financial collapse, the re-elected president will now have a much freer hand to say what he thinks about Europe’s euro irresolution. If Obama decides to take the gloves off with the Old Continent, this could lead to some wounding exchanges, particularly with Berlin.

Obama will probably side more overtly with France and Italy to rail against alleged German intransigence on helping Greece and other problem-hit countries — which will not go down well with Chancellor Angela Merkel.

Significantly, the most resounding approval in Europe for Obama’s win came from France’s president François Hollande, who sees the U.S. as an ally in his anti-austerity campaign against Germany.

Second, now that the election is out of the way, greater optimism about U.S. economic growth may start to take hold internationally — depending, of course, whether the so-far-intractable issue of the U.S. fiscal cliff can be resolved.

This coincides with steadily worsening economic news from Europe. The gap between U.S. and euro-area growth could widen next year to nearly 3 percentage points, the largest since the euro began. This could have an effect on weakening the euro — good news for the deficit-hit states of southern Europe, but bad for resolve and morale in Germany and the other creditor countries of Europe that are being called upon to shoulder larger parts of the financial burdens facing the south.

Third, despite the pressure points, German unwillingness to agree on more generous action over Greece, Spain and the others is likely to increase, not diminish, as the timetable moves into gear for next year’s German federal elections.

A strong reason why the European Central Bank’s much-trumped bond-buying plans are on hold is because the Bundesbank’s negative views on the matter have already been well-circulated in political circles and in the marketplace. The “phoney war” on the ECB’s so-called outright monetary transactions program could continue until the New Year. In fact, in terms of the impact on Spanish and Italian bond yields, we may have already seen the best of the impact of the OMT program.

As the French 18th century philosopher Voltaire once quipped about the Holy Roman Empire — “neither holy, nor Roman, nor an empire” — future historians may say that the OMT was nether outright, nor monetary nor a transaction.

It is certainly taking a long time to get going. This reflects the eye-watering contradictions of the conditionality that requires the Spanish government, the most badly hit contender for funds, to approach Europe for a further bailout deal without being able to tell parliamentarians what it will get in return.


The Bundesbank’s conditions for a successful OMT are the same as it habitually applied to foreign exchange market intervention in the past. Action should be powerful, coordinated and in line with fundamental market trends. In the case of the OMT, it is unclear whether these three preconditions are in place.

The problem with the OMT is that, once started, it will be very difficult to stop. The longer the delay in implementing it, the greater will be the resolve of its opponents. And the larger will be the reluctance to break the seals on a Pandora’s box that, once opened, can be closed only with the greatest difficulty.

All this is compounded by further euro-area brinkmanship on Greece after international lenders failed to bridge differences on how to reduce Athens’ still-disastrous debt levels, bringing the country close to defaulting on a €5 billion debt payment due at the end of this week.

Only nine months ago, Greece benefited from by far the greatest sovereign debt restructuring in history. Yet it is further away than ever in solving its debt problems, since austerity — as many people predicted — has simply made the debt problem worse.

Don’t forget: this calamitous outcome occurred under the aegis of the International Monetary Fund. The combination of circumstances makes the IMF much less likely to get involved in further bailout packages, whether for Greece or other struggling states like Spain.


In his new steely post-election mood, Obama will join with leading emerging market economies such as Brazil, China and India in declaring that Europe must sort out its mess by itself — which can only mean more money from the Germans.

Let’s see how this plays in Main Streets all over Germany as Merkel prepares for her own election in less than a year.


Growing activity by reserve-rich economies could exacerbate European tensions

published in Financial News on 5th November 2007

The debate about the influence of sovereign wealth funds is a rerun of controversies that flared more than 30 years ago after the first oil price shock in 1973.

Last week, the International Monetary Fund called for more transparency from the funds, which are pools of assets controlled by public sector investment vehicles from reserve-rich economies, mainly from the emerging world. The IMF wants to ease concern that the funds are creating undue influence in the west through fast-growing stakes in companies in the US and Europe. The move parallels efforts made in 1974 by West German Chancellor Helmut Schmidt to control the swell of participation by oil-rich countries led by Kuwait in companies such as Daimler-Benz and Hoechst, the German motor and chemicals groups.

The difference is one of scale. In 1974, West Germany was by far the world’s largest reserve holder with about $25bn in official foreign exchange reserves. The Germans then accounted for about 15% of overall world foreign exchange reserves of $160bn. Fred Bergsten, the American economist and later US Treasury Under-Secretary, now director of the Peterson Institute for International Economics in Washington, in 1974 said West Germany was the world’s second superpower after the US because of its international assets.

The contrast with today’s picture is remarkable. Enormous reserves wielded by China and other emerging economies such as Russia, South Korea and Taiwan far outstrip the official holdings of Germany and other industrialised countries. Germany’s published foreign exchange reserves of more than $40bn make up only 0.7% of declared global foreign exchange reserves, which mushroomed to $5.7 trillion as of mid-2007, according to the IMF. Figures for official foreign exchange holdings understate the amounts at the disposal of emerging economies. Studies from Standard Chartered and Morgan Stanley put the funds’ size at $2.2 trillion and $2.5 trillion respectively, double total official currency reserves. Some of the best-known funds have been around since the 1970s.

The Abu Dhabi Investment Authority, with about $875bn under management, was founded in 1978; the Government of Singapore Investment Corporation ($350bn) and the country’s Temasek Holdings ($100bn) in 1981 and 1974 respectively, Norway’s Government Pension Fund ($300bn) in 1990 and the Kuwait Investment Authority ($70bn) in 1960.

Attention in the past few weeks has focused on episodes such as the Qatar Investment Authority’s backing for a potential bid for UK retailer J Sainsbury, the possible purchase by China’s Citic Bank of a stake in US investment bank Bear Stearns and the deployment of a new $40bn investment fund from Libya.

China remains the main focus. China’s currency reserves are growing by about $1bn a day and total between $1.3 trillion and $1.4 trillion. China has been active for some time in acquiring high-profile oil assets in Africa, signalling its shift into such investments by subscribing in May for $3bn in the initial public offering of US private equity group Blackstone.

Schmidt, the world’s oldest senior commentator on global and monetary affairs, is following the development of the emerging world’s riches. He believes China will deploy more of its wealth in companies in the US, Europe and Africa. Schmidt said China will also take further steps away from buying US treasury bills, thought to account for about 75% of its reserves up to now. Schmidt said the Chinese strategy of relying on the dollar is a “ridiculous mis-investment”.

More active management of Chinese foreign exchange holdings creates a conundrum for US Federal Reserve chairman Ben Bernanke and Jean-Claude Trichet, president of the European Central Bank. Much American international monetary diplomacy has been directed at persuading the Chinese authorities to  accept a higher rate for the renminbi as part of an effort to lower the enormous Chinese trade surplus with the US. American policy on the renminbi is inciting a larger role for the euro in overall reserve currency holdings. If the Chinese central bank lowers its purchases of dollars, allowing the renminbi to float higher on the foreign exchanges, the assumption must be that the share of euros in the Chinese central bank reserves will rise in time. According to the IMF, the euro makes up an estimated 26% of world reserve holdings against 64% for the dollar, down from 69% when the euro was introduced at the start of 1999.  Capturing a greater share of world reserve currency holdings was one of the goals for the Europeans, particularly the French, when the euro was established. However, a further rise in the European currency caused by more aggressive reserve management by reserve holders and sovereign wealth funds would inflame tensions within Europe.

The balance of payments of the euro nations is on par with the rest of the world. But this masks a large current account surplus from Germany and growing current account deficits from the other lending euro economies of France, Italy and Spain. A further rise in the euro might not be unwelcome for Germany and the Deutsche Bundesbank would see it as a means of shielding the country from higher inflation caused by climbing oil prices. However, further euro revaluation would set alarm bells ringing in Paris, particularly after last week’s fresh Federal Reserve interest rate easing.

If the Chinese heed Schmidt’s call to channel more funds into the euro, Trichet can expect still more clamouring for lower euro interest rates from the French Government.