French can can versus German nein, nein, nein

Trying to read the tea leaves relating to the continued stalemate within the Euro Zone is particularly difficult, especially with all the “noise” around at present.

However, I believe it comes down to this.

Germany will be more “susceptible” (whether openly or by repeating that the ECB is an independent organisation – more likely) to ECB involvement (whether additional bond buying/QE etc, etc), if Euro Zone countries pre agree to CENTRAL FISCAL OVERSIGHT. Whilst a number of countries will clearly hate it, I cant see any major opposition, other than from France. Indeed, France is fundamentally opposed. However, it is difficult for Germany to agree to loosening up on monetary policy,
unless they can convince their public that strict fiscal measures have been put in place and that any monetary easing will be temporary – even though temporary will last a very long time. This will require the Euro Zone treaty changes that Mrs M has been pushing. She has conceded that such oversight will apply to Euro Zone country’s only – she realises that she does not have a snowball chance in hell of
persuading/forcing the Brits to concede on this issue – in any event, the UK is out of the Euro.

Who wins will depend on the markets – if the situation heads towards real free fall (getting there, but not quite there as yet), the pressure will be on Germany to cave in.

Personally, I hope that Germany wins, as it will provide for a more stable Euro Zone and, in any event is inevitable, particularly if the Euro Zone wants to issue Euro Bonds.

However, French pride is the issue – a big deal, I assure you.

Germany’s nein, nein, nein policy re monetary policy is as dead as Mr Cain’s Presidential aspirations, with France’s can can version (re the ECB) prevailing. Much more fun as well.

By the way, I erroneously reported that Baroin was the French PM – he is, off course, the Finance Minister, Mr Fillon is the PM.

I am increasingly of the view that the UK and Germany will get closer, in spite of today’s article in the Telegraph that Germany was trying to block any potential EU referendum in the UK – silly, if the report is true as Cameron wont let it happen, particularly at this time. After all, you really don’t need more uncertainty at present.

I have to say that the last few days has truly tested, though has notchanged my mind, that there is no alternative, other than ECB bond buying/QE.

In any event, reports suggest that the ECB has been buying Italian and Spanish bonds, apparently in size – will have to wait till this coming and the following Monday for confirmation. They have to, or there will be no Euro for the ECB to worry about. Indeed, the ECB will need to continue to buy in size, if they want to regain market credibility, which they lost as a result of reducing bond purchases by more than 50% last week, from the previous week.

The other thought I would like to leave with you, is to ask just how financially strong is Germany. Recent poorly received bond auctions (not for the 1st time), together with Moody’s downgrade of a number of Landersbanks (as they believe that German will be fiscally stretched if it has to do all that it is called upon to do) suggests to me that Mr Market may test the commonly held view of German financial strength. More on this later.

I am gradually adding to my financials, energy, telecoms, building materials and even a luxury products manufacturer positions, whilst crossing my fingers at the same time – my latest investment strategy !!!!.

Finally, I’m even more convinced that ECB rates will be reduced below 1.0% in due course – bad for the Euro, which is still too high. The Euro is currently being supported by banks liquidating overseas assets and repatriating funds, combined with Chinese and Middle East buying apparently.

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Kiron Sarkar is an investor and advisorin London. Formerly in the M&A dept of N M Rothschild in London, he was head of M&A of Rothschild (Hong Kong) and worked on their international privatisation team. He worked as privatisation adviser to the UK Governments Know How Fund. Most recently, he was European Head of Media, Tech and Telecoms at CIBC World markets. Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.