Markets or ministers, who will prevail in EU crisis?

16th May 2010, Comments 0 comments

The eurozone deficit and debt crisis has pitted politicians against financial markets in a blame game that reveals failings on both sides, observers say.

Political leaders have denounced speculators as predators who thwart economic reform plans.

But those who defend the markets say they are largely made up of prudent insurers and pension funds that protect the savings of ordinary people.

As governments around the world consider greater market regulation, investors have called on say political leaders to sort out the public finances to ensure a sustainable recovery can take hold.

German Chancellor Angela Merkel has spoken of "a battle of politicians against the markets" and some politicians have accused speculators of attacking the economies of Greece, Portugal and Spain.

They are generally considered the most vulnerable eurozone economies.

French President Nicolas Sarkozy vowed to "mercilessly combat speculation" and warned those who bet against eurozone partners would soon "know once and for all what lies in store for them."

Earlier this month, the European Union and International Monetary Fund unveiled a 750-billion-euro (one-trillion-dollar) plan to ensure EU members could refinance debt and underpin their sovereign ratings on capital markets.

Markets were impressed by the figure, which comes on top of another 110 billion euros for Greece alone.

But some observers have wondered if governments will be able to rein in deficits and debt without driving economies into the dumps and sparking social strife.

And some economists have questioned the European Central Bank's (ECB) independence after it broke a taboo by buying government debt as part of the rescue plan.

Pressure has eased on public debt, but the markets are still on edge.

Last week, the euro plunged to around 1.2350 dollars as investors examined the eurozone's economic prospects amid reports of squabbling between France and Germany, two of the zone's economic giants..

Well before the Greek crisis erupted last year, one German politician had described the speculative investment funds as "locusts".

They have since been compared to packs of wolves and vultures.

But UniCredit chief economist Marco Annunziata warned last week of a "witch hunt".

"Demonizing markets has been a running theme in the rhetoric of EU policymakers since the beginning of the debt crisis," he complained.

Analysts and media have not spared politicians either however.

After French Finance Minister Christine Lagarde said markets now understood the eurozone would defend Europe's single currency, Saxo Bank chief economist David Karsbol retorted that the EU measures would in fact weaken the euro.

"We know that the French politicians have zero understanding of even simple market concepts, but this is beyond ridiculous," Karsbol said.

Ansgar Belke, a German research director at the DIW economic institute, told AFP: "I think politicians have become more and more dependent" on industry experts with respect to legislation on financial and energy markets.

In some respects, he argued, governments were their own worst enemies, he argued.

For failure to coordinate policy among the G20 group of leading and emerging economies "gives huge leeway to those acting on financial markets," he said.

"Markets appear to be the leader in the sequence of events, politicians follow and finally the institutions, bureaucrats like the ECB follow behind," he added.

In an initiative launched last week however, the European Commission said it would pre-vet member states' budgets from next year.

It also called for the power to sanction countries that repeatedly breached EU limits on the public deficit and debt.

For Annunziata, the commission had presented "an extremely lucid analysis that clearly identifies the areas where the EU's policy framework must be strengthened."

But he also urged lawmakers to recognize that 'the markets' "are not just a collection of greedy speculators.

"The markets are in large part made of pension funds and insurance companies trying to protect the value of their investments so they can honour their liabilities to retirees and other citizens," he noted.

Markets were also where governments ultimately found the money to pay off the surge in debt as officials sought to halt the global slowdown last year, he said.

So when investors voiced concerns about national debt levels, "they should be listened to, not treated as the enemy," he added.

But banks, along with power companies and other organisations that lobbied or "counselled" lawmakers drafting complex legislation were not exempt from criticism, Belke said.

"They have to admit that markets are not perfect at the moment," and curb a tendency to hamper competition and obstruct greater transparency, the economist told AFP.

"They do not accept free markets," he said.

While the struggle for economic leadership is sure to continue, some would like to call a truce.

Spain's top diplomat, Foreign Minister Miguel Angel Morantinos said after the EU/IMF plan was approved: "I hope that will be the end of the battle."

© 2010 AFP

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