Monti, Draghi and the Goldman pact

The solution to save the eurozone hinges on two former Goldman employees working together. Increasingly, politicians have business interests at heart, not the people's.

We are very close to a Goldman Sachs style ‘solution’ to the European crisis, which explains why global stock markets are so strong. And that solution looks like being achieved by bypassing democratically elected politicians (The moral bankruptcy of our ruling classes, August 13).

Many market people believe the ‘solution’ will release big amounts of the currently sidelined cash into the share market.

The driver of the ‘solution’ is not the leaders of Germany or France, who normally dominate European affairs, but rather Italian Prime Minister Mario Monti. Monti is not an elected prime minster but was appointed by hopelessly divided politicians last November and he brought together a cabinet of technocrats. In recent European leaders meetings, Monti dominated because he was the one leader who could walk out and leave the euro.

Unlike Spain, Italy has an industrial base that rivals Germany. Monti has changed the crazy Italian labour laws so Italy can once again compete. If Italy left the euro, the Italian Lira would fall in value against the euro and the Italian motor companies and other industries would decimate the German industrial base that has been such a big winner from the euro.

Monti made it clear that if Italy stayed, it meant that the European community would have to embrace a solution that was similar to that proposed by the European Central Bank President, Mario Draghi.

Under the Draghi plan, the central bank would buy bonds in distressed European countries (and possibly cancel them) – effectively money printing. The Draghi plan was opposed by many in Germany with opposition led by Germany’s central bank, the Bundesbank, which opposes money printing

The German Chancellor, the previously dominant European power broker, Angela Merkel buckled. The Bundesbank looks like being bypassed.

Last night an upbeat Mario Monti could sense success was near and told Italian leaders: "I see the moment approaching in which we'll emerge.'' Italy now has "more respect, credibility and even influence in Europe''.

But he lamented that Italy's youths have paid a "very high'' price in terms of bleak job prospects, because politicians avoided for years tough action, such as labour market reforms.

What we are now seeing is the so-called power of major industrial and commercial forces overriding the so-called power of the people.

Large parts of the German population are vigorously opposed to the ECB money-printing program because of the effect it will have on their savings. But Merkel also knew that the major German industries would be greatly damaged if they had to compete with an Italian industrial base aided by sensible labour laws and a much lower currency if Italy left the euro.

Mario Monti knew how to play the game. Monti is a former adviser to Goldman Sachs. His ECB president ‘partner’ Mario Draghi also worked for Goldman Sachs. This is a business driven solution to the European crisis.

And so just as Goldman and similar firms played a big role in creating the European crisis – as they did with sub prime in the US – so it is people with experience in the investment-banking world that are going to overcome it.

At the ADC Hayman Retreat, I yarned with Philip Blond who is head of the UK Centre Right think tank ResPublica. Blond believes that what we are seeing in Europe is part of massive change in global power that, in time, will be reversed.

And so while in Europe it was the massive power of the German and Italian industrial complexes that governed the politicians, in the US, Wall Street calls the shots. Even though the giant banks created the sub-prime crisis, which delivered so much misery to the people, the US government was not able to tackle Wall Street – it was too powerful. .

And to illustrate its power, Wall Street has demanded and received rights to make a fortune via legalised insider trading – the so called high frequency trading. The major international groups used their muscle to achieve legalised insider trading advantages in Australia (Time to control the trading machines August 6).

But the same thing is happening in former Communist countries like Russia and China. In Russia, the power of the large businesses is enormous. In China, the new leadership has great wealth. Bloomberg was banned from China for reporting on this wealth.

So while we may rejoice in the possibility of a European solution (which if it were achieved would take pressure off our banks) we need to understand that it is part of a wider change in political control which may be reversed in time.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles