The eurozone crisis has gone on for months and the strategy of Germany appears to be brinkmanship: push peripheral countries to the edge of the cliff and let the markets attack, in hopes that the spreading panic will force the governments of these countries to agree to demands for more central fiscal authority (but not co-responsibility) and deeper austerity. Leave them tottering on the cliff’s edge, the Germans appear to be saying, and they will give us what we want.
But Germany’s strategy now looks like it may backfire.
First the Germans were unable to cover all their financing needs in a recent bond auction, and their bond rates inched upward against the US dollar and the UK pound. And now Standard & Poors has announced that it has put on rating watch the sovereign debt of 15 European countries, among them Germany.
Standard and Poors
Germany is one of six triple-A rated countries in the eurozone that now faces a 50% chance of having its sovereign debt downgraded within 90 days (the others are France, Luxembourg, Netherlands, Finland and Austria). S&P made it clear that the outcome of the December 9 summit would be decisive in whether or not the downgrade occurs.
Critics might point out that when S&P downgraded U.S. sovereign debt in August, from AAA to AA+, markets reacted by raising U.S. bond prices and reducing yields rather than the opposite. This could conceivably occur in the eurozone. However, it is less likely: the reason that U.S. bond prices did not suffer was not simply disregard of the rating agencies, but the fact that there is no substitute for the huge U.S. bond market in absorbing the world’s savings. Germany is not in a similar position.
Will the threat to Germany’s cherished creditworthiness make her more willing to compromise in order to save the euro? Or to accede to measures that are not truly even compromise, such as giving the nod to the ECB to buy peripheral bonds without limit?
The next four days will be decisive in the short history of the euro. Let’s hope that Germany can have a broad enough world view to look beyond what she perceives as her national interests and act in the interests of all… which, as the S&P announcement demonstrates, are actually German interests as well.