Discussions of austerity often get reduced to attacks about the greediness of the lenders and the wastefulness of the debtors.
By Vikram Rangala
Saturday, February 14, 2015
While some have sought to cast Germany and Greece in these roles— the über-efficient, frugal Germans versus the socialist, irresponsible beach bums of the Aegean— the truth is, they are coming to an agreement that allows both sides to save face.
German Chancellor Angela Merkel, after talks she called “very friendly,” urged Greece to move forward with its next request, indicating that Germany would support it. She characterized it as a continuation of the bailout program, which allows Germany to avoid looking as though they gave in to any new demands.
Meanwhile, Greek Prime Minister Alexis Tsipras signaled that he would be willing to compromise, as would the EU, on the exact terms of continued support, both in new aid and in debt restructuring. In short, both sides are willing to let the other have some of what it needs to maintain public confidence. They’re willing to work together, which is, after all, the whole point of a European Union.
News headlines drive algorithmic trading
Along the way, expect a good number of headlines with words like "impasse" and "breakdown." It's part of what keeps the news business in business.
And since the news-based trading algorithms trigger buy and sell orders from those headlines, we can expect further volatility resulting from them. My sources who watch the actual order flow in the stock and currency futures have been pointing to the news algos as a growing factor in the overall price action.
The history of austerity
Beyond the headlines lies the larger political reality that one-upmanship is not as good for any of Europe's leaders as a show of unity, especially in the face of Russian president Vladimir Putin's aggression in Ukraine and recent overtures to Greece.
You could point to historical or practical reasons for the move to work out an equitable deal. It’s true that Germany still remembers the poverty and unrest that came after the “austerity” program imposed on it after WWI; they also remember the Marshall Plan. The contrast between the two programs and their outcomes is a guide for action in 2015.
Germany is prosperous today and powerful enough to dictate terms precisely because of Allied generosity after WWII. They don't want to send Greece and Europe down that old dark path. The one thing everyone agrees on is that extremism born of economic hardship is bad for everyone.
Just between us Europeans
Besides history, a more practical reason is just as much a factor: the stock market is up in Germany and Greece. The DAX just set a new all-time high and the Athens exchange gained 5% yesterday as bond yields dropped. The fact that both happened in the same day is yet another sign that Europeans agree: what’s good for part of Europe is good for the rest of it, as well.
Mario Draghi and the ECB have also weighed in, calling for a political solution and stating plainly that they don't have the cash to prop up Greece under the existing repayment regime. Even the Fed at its most activist has never waded into an international negotiation. But that shows us how thoroughly the Europeans have moved to a collective attitude. To them this isn't foreign policy. It's an internal matter.
That such a change in attitude, unthinkable even a decade ago, is quietly dominating this discussion is reason enough for the markets to rally.
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