by Chidem Kurdas
Before the near-trillion-dollar bailout package for financially shaky euro-zone governments was announced, French president Nicolas Sarkozy hauled out the financial whipping boys yet again. He promised to “confront speculators mercilessly.” They would soon “know once and for all what lies in store for them,” he said.
Presumably he meant that those betting on the decline of the euro will be squeezed and made to understand that he and his fellow office holders will protect the currency. Thus Mr. Sarkozy framed the issue—we’re not bailing out profligate governments, we’re defending our common currency against demonic speculators.
This message appears to play well politically But beneficial as it may be in the short term for those in office, it compounds the real problem.
Pillorying traders who try to make money as the euro loses value helps obscure the fundamental reason for the currency’s weakness, namely deficit-ridden and over-extended state budgets. If the fault lies with a bunch of Gordon Gekko characters, the solution is simple. Haul them off to jail, or if that can’t be arranged, make them lose money on their trades and sweat in front of parliamentary committees.
The alternative is much less palatable. Bloated public payrolls have to be cut. People have to retrench. This is the reality, previously kept at bay by plentiful credit. Much easier to hang Gordon Gekko in effigy. But that way of thinking makes the public less willing to accept the necessary steps.
Thus rioting Greeks blamed Goldman Sachs, among other culprits. They say Goldman should pay for the mess—with the obvious implication that austerity measures should not be imposed on Greece.
A debt contraction is upon us whether we like it or not. Spendthrift governments and their constituents have to change their ways. By endlessly telling people it’s the fault of financial players, politicians are making change more difficult. Sarkozy’s rant against speculators causes one to be less optimistic about the prospects for public finances. Governments are to be bailed out, whatever the moral hazard and future liabilities this creates.
What does that say about the future of sovereign debt? Sounds like short selling the euro is a good idea!
As for French president’s claim that anyone who looks to trade on Europe’s travails is toast, that’s not clear so far. The gigantic bailout buoyed stock markets but not really the euro, which gained a bit but remains down significantly against the US dollar. Anyone who watched the antics of European politicians must have decided to sell the currency.