The Corner

The Overton Fenster

As I mentioned yesterday, Germany’s anti-euro Alternative für Deutchsland is making further inroads with voters. And that’s a good thing. I also commented that “the AfD will not play a part in any national government any time soon, but fear of its vote-pulling power may start to drag some of the establishment parties in a more euroskeptic direction.” That’s good too. 

Now, writing in the Financial Times, Wolfgang Munchau explains that this process may already be underway:

It is no coincidence that the German government is once again talking tough with the rest of the eurozone. Last week we heard that Wolfgang Schäuble, finance minister, had criticised the ECB’s programme of private-sector asset purchases. He rejected the central bank’s suggestions that governments should guarantee asset-backed securities – financial instruments that transform loans into tradable paper. He rejected a proposal that would have diverted funds that were originally intended to prevent financial speculators from attacking the bonds of eurozone governments, releasing them for the broader purpose of boosting investment.

Markus Söder, finance minister of the conservative-run state of Bavaria, was even more outspoken, arguing that an EU investment programme would end up stimulating support for the AfD. The German government is reverting to its previous habit of saying “Nein, Nein, Nein” to its eurozone partners. At least in part, this is because the AfD is breathing down its neck.

The AfD is biding its time. It believes, probably correctly, that the euro crisis is likely to return, at which point it will press for Germany’s departure from the eurozone. None of this has yet arrived on the radar screen of international investors, who have reverted to the pre-crisis habit of treating all eurozone debt as equivalent. They take the ECB’s conditional guarantee that it will act as a lender of last resort – which is subject to a legal dispute – as a permanent and unconditional bailout guarantee.

One reason for the current stability in financial markets is the high degree of what you might call constructive ambiguity regarding Germany’s willingness – and the ECB’s ability – to bankroll the system. The AfD will bring some unhelpful clarity about the limits of Germany’s engagement. The rest of the eurozone might be in for a shock.

One place where trouble might strike is the sovereign bond market. I am hearing increasingly the view that we should ignore debt ratios, notably that of debt-to-gross domestic product, as a metric for debt sustainability. We should instead focus on affordability – debt service costs as a ratio of fiscal revenues. At present these are quite low, because bond yields are low. Those who tell us not to worry about debt ratios are telling us that good times will go on forever.

The AfD only needs to create doubt to upset this equilibrium. It does not need to win an election or become part of a government. Its strategy will be to test the limits of Germany’s commitment. That strategy stands a fair chance of success. And when that happens, it will wreak havoc.

I’d say “if” rather than “when,” but if that “havoc” does indeed come to pass it won’t (by definition) be comfortable, but it may be necessary if Europe is to have any chance of extricating itself from the trap that is the euro.

Meanwhile in France (the BBC reports):

France’s far-right National Front (FN) party has won its first two seats in the upper house of parliament, in what party leader Marine Le Pen has described as a “historic victory”. Partial results show right-wing parties are gaining control of the Senate, with final results expected on Monday.

It comes after a strong showing by the far right in European elections in May. It will be seen as another blow for President Francois Hollande, whose popularity has hit record lows. Half of the Senate’s 348 seats are elected by regional officials across the country every three years.

“There is only one door left for us to push and it is that of the Elysee [presidential palace],” said Stephane Ravier, one of the two newly elected FN senators.