September 5, 2012 / 5:52 AM / 6 years ago

Analysis: The trust of a rogue

LONDON (Reuters) - Seek the trust of financial markets, but only so far as you can trust them.

Germany’s paradoxical stance towards financial markets - lauding them for imposing economic discipline, lambasting them for short-termism and irrationality - has been advanced again in series of recent speeches.

Perhaps preparing the public for a renewed effort to realign skewed euro debt yields - as the European Central Bank is expected to outline this week - or maybe just underlining the need for more financial regulation and supervision, Germany’s Chancellor Angela Merkel was scathing about markets this week.

She insisted Germany’s “guiding principle” remained that of a social market economy, where markets are not allowed to “run wild” and must serve the people rather than the other way around.

“When we look at international markets over the last five years, then we see that they haven’t served people, rather they enriched a few, and many people around the world have paid the price for this,” she told Bavarian festival goers on Monday.

“The main task for politics today is to bring the spirit of the social market economy into the financial markets so that international financial crises don’t repeatedly ruin what people have built up with their own hands and hard work.”

Noble sentiments for sure and hardly controversial. Five years of seemingly endless credit turmoil, bank collapses and market herding have hobbled the world economy and clearly expose the folly of free market excesses.

But the puzzling bit of the German message is that its skepticism about market efficiency comes in tandem with an insistence that other euro zone countries - and presumably businesses and households - should secure the confidence of those same markets it so deeply mistrusts.

In an interview with the Irish Times newspaper last month, for example, German Finance Minister Wolfgang Schaeuble stressed repeatedly that bail-out countries such as Ireland or Greece needed to stick with austerity and reforms to rebuild the trust of markets rather than seeking more concessions from euro partners.

Yet, in the same breath, he implied that investors and creditors in the United States or Asia probably didn’t understand the nuances of reasonable policymaking.

“We cannot do anything that generates new uncertainty on the financial markets and lose trust which Ireland is just at the point of winning back,” he said, referring to Irish requests for direct European support for its banks - such as Spain received - that would reduce the heavy debt burden on the government.

“We will have to avoid generating a headline like ‘Aid program for Ireland topped up’ because then investors in California or Shanghai might not understand that this top-up is a reward for Ireland.”


Now, doubting the sophistication or foresight of investors is consistent at least with Germany’s long-held market skepticism.

But the parallel insistence that these random players should be viewed as arbiters of good policy then seems odd.

“The Germans have had this long, weird interplay with the markets - they don’t like to be led by them, but at the same time my suspicion is they often try to use the markets to execute goals they want. I think that’s behind this complex situation still unveiling in Europe,” said Jim O’Neill, chairman of Goldman Sachs Asset Management.

“They don’t want to be dictated to, but they sure like using the markets to push other countries in directions the Germans want to go,” he told Reuters Insider television.

So is the German position toward free markets, their regulation and the need for routine government or central bank intervention just Machiavellian or does it have its own logic?

Bernhard Speyer, joint head of Deutsche Bank Research, reckons the stance is highly reflective of German public opinion - that finance and free markets are useful only up to a point and are there solely to serve industry rather than being wealth-generating industries in their own right.

“There are two views at work. First is that financial markets do not understand the constraints of policy or respect the primacy of democratic developments and governments must therefore enforce the latter.

“The second is financial markets by themselves are not able to find a stable equilibrium and that’s another justification for constant government intervention, albeit one with a consequence of making markets even more volatile.”

Speyer reckons this idea of using market forces to some extent, but in tandem with government direction or intervention, has been around since the euro was first devised. The monetary union treaty has both a “no-bailout” clause and a government administered “stability and growth” pact.

This dual thread persists today. Germany demands reform and cuts to gain market trust while developing an intergovernmental fiscal pact and agreeing intervention by the ECB or European Stability Mechanism to correct market skews.

“I think there’s a grain of truth on both sides and if you take that as a foundation for the ‘muddle through’ approach of European institutions in this crisis, then it all starts to appear more strategic than at first sight.”

Additional reporting by Alexandra Hudson and Axel Threlfall; Editing by Ruth Pitchford

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