Opinion Fortune-hunting in Berlin

This suspicion was partially confirmed to me last week in the course of an interaction with a member of the German parliament in Berlin. An economic expert assisting the German MP said a joint parliament committee was indeed looking at the extent of toxic financial assets in the books of big German banks. Asked what could be the quantum of such toxic assets,he said he was not at liberty to reveal that. One clearly got the impression that the German banks are holding enough dud financial products to cause deep worry among the top political leadership.

Meanwhile,the global market players are not convinced that Germany is in control of the overall situation in Europe in spite of the 750 billion euro (nearly $1 trillion) financial rescue package announced for the region. Germany has taken specific responsibility for loan guarantees amounting to 123 billion euros out of a total 440 billion euros envisaged in the package. Besides the loan guarantees,the eurozone stability package involves 60 billion euros of emergency funding from the European Commission while the International Monetary Fund will contribute up to 250 billion euros.

One reason why the sovereign debt crises in Europe could develop into another financial markets contagion is that global markets are clearly sensing the political leadership in Germany to be somewhat divided on the kind of solutions that might be appropriate to deal with the ongoing problems. Political uncertainty is fertile ground for speculators. In fact,some of these issues might be taken up by the heads of state of G-20 economies at Toronto later this month. However,one is not sure whether solutions thrashed out at G-20 would be acceptable to national governments,given the compulsions of coalition politics. For instance,German politicians are increasingly concerned over the media campaign against Germany taking “excessive responsibility” to bail out the eurozone countries.

Chancellor Angela Merkel’s conservative-liberal coalition no longer has a majority in the Bundesrat,the upper house,after a similar coalition in North Rhine-Westphalia was voted out of power. The government is now at the mercy of the opposition to get crucial bills passed. The opposition Social Democratic Party (SDP) says it will not support bailout legislation unless a financial transaction levy is imposed to discourage speculative trading in the financial markets. The Left and Social Democrats in Germany argue that a Tobin tax on all financial market transactions would yield revenues for the government and mitigate the fiscal burden on Germany. Interestingly,the idea of Tobin tax has gained currency in Germany these past few weeks and Chancellor Merkel,who was opposed to it in the past,is said to be considering it actively.

The G-20 heads of state meeting in Toronto could discuss Tobin tax if Germany forces it on the table following domestic political pressure. The official communiqué of the G-20 finance ministers’ meet last week at Busan avoided mentioning the financial transaction tax levy,though the idea did come up for discussion. In the Indian context,RBI Governor D. Subbarao too had recently stated that India could consider a special financial transaction tax levy if the situation so demanded in the future.

So the euro crisis is throwing up all kinds of new ideas,some politically triggered,which could have implications for the global financial markets in the future. The G-20 is currently engaged mainly in discussions over the reform of the international financial system post the 2008 crises. The core reforms in this regard involve putting in place new rules under the Basel Committee for boosting bank capital and preventing excessive risk taking and leverage by the financial system. The Obama administration has already come up with a slew of stringent measures to rein in financial sector players. Wall Street did not particularly like the Obama package.

Going forward,the G-20 will also witness some contestation among nations over the decision-making process at multilateral institutions such as the IMF. Some American lawmakers are already complaining that the US will be handed a big bill to rescue Greece from default because it is the IMF’s largest shareholder. On the flip side,countries like India and China may rightly feel they have not been consulted by the IMF before announcing the big bailout package for the eurozone economies. The BRIC countries must raise the issue of the IMF’s double standards,in this regard.

As part of the reform of the international financial system,the US and European Union will also throw up the issue of revaluation of the Chinese currency,now an obsession with Western policy-makers. One cannot entirely blame the Chinese currency for the deeper structural problems that have developed in the Western economies over decades. G-20 policy-makers are dealing with multiple crises to which they have so far been coming up with short-term,reactive responses. The deeper,organic changes in the global economy are beyond our collective wit for now.

The writer is Managing Editor,‘The Financial Express’

mk.venu@expressindia.com