Merkel v the Markets

Merkel v the Markets

Breakin' rocks in the hot sun

I fought the law and the law won

I fought the law and the law won

I needed money ‘cause I had none

I fought the law and the law won

I fought the law and the law won

The lyrics from the Clash I fought the law keep ringing in my head.

It just goes someway to describe the current financial crisis imperilling the existence of the eurozone. Eurozone leaders would like you to think otherwise.

German Chancellor Angela Merkel's attempts to kick Greece's financial crisis into the long grass came a cropper thanks to the persistence of the financial markets. Merkel argues she was right to get Greece to take tougher austerity measures. She may be right – but investors forced her hand and she had to come to the table and negotiate the world's biggest bailout for a country.

What was Greece's problem is now Germany's as well. And Germany is about to take on the financial burden of other eurozone nations – some estimates place the cost of bailing out Portugal, Spain and Ireland at about $650bn.

Investors – in the form of hedge, vulture funds – are preparing to target those nations by shorting stocks, currency and debt. They are unlikely to flag up their moves in advance but when they do, other investors will be watching closely because they won't want to be on the wrong side of those bets.

Britain v George Soros

There appears to be a reluctance among Western nations to interfere in the functioning of the markets. There's good reason.

The most famous case of investors betting against a currency and nations was that of George Soros. His $10bn bet won him the title of "the man who broke the Bank of England". Back in September 1992, the UK was forced to withdraw its currency from the European Exchange Rate Mechanism – a holding mechanism for currencies aspiring to join the euro.

During the financial crisis – Britain led some nations in banning short selling of some bank stocks. That was a temporary measure.

Malaysia v Currency Speculators

During the Asian financial crisis in 1997, currencies in the region came under sustained attack. The then prime minister of Malaysia, Mahathir Mohamad, accused Soros of currency manipulation and being part of a destabilising worldwide Jewish conspiracy.

Malaysia moved - albeit slowly - to peg its currency to the dollar and tightened the flow of money in and out of the country. Its move was criticised by the International Monetary Fund but it later acknowledged Malaysia had made the right decision.

Brazil/China  v the markets

The global financial crisis gave China a reason to fix its currency to the dollar – and it's taken a lot of flak for its move. And last year, Brazil moved to curb the rise of its currency, fearing it would make the country uncompetitive. It slapped a tax on money coming into the country. That move hasn't entirely worked. Brazil is just one of those nations everyone wants a piece of right now.

Merkel & Co cannot continue to fight the law. Markets will pick apart the eurozone. The best course of action is to let Greece exit the euro and other nations that breach their budget deficit targets should also be shown the exit.

Germany and the eurozone don't have an endless pit of money to salvage its members. And investors won't continue to lend money for the bailouts. And when that happens it'll have to consider the unthinkable: a hefty devaluation of the euro and peg to the dollar. That'll go down well in the United States.