08.12.2011
Slaughter by austerity butchers
The "Merkozy" plan for greater "fiscal union" looks set to be another failure, writes Eddie Ford
With the clock ticking loudly against the euro zone project, if not the continued existence of the actual European Union itself, European leaders are - yet again - holding crunch, ‘make or break’ talks on how to resolve the crisis. Déjà vu. There are wide expectations therefore that the European Central Bank’s December 8 monthly policy meeting will outline new measures and then on December 9 there will be a crucial - excuse the cliché - EU summit in Brussels.
However, nothing seems to be working. The euro crisis continues inexorably, threatening to bring down the house of cards that it is the world economy. Perhaps desperately, on November 30 the US Federal Reserve, the European Central Bank and the central banks of the UK, Canada, Japan and Switzerland announced that as from December 5 they would take “coordinated action” to contain the growing credit crisis among the various euro zone banks - and China too said it would “free up” money for its banks to lend to Europe by cutting the minimum amount of cash the country’s banks have to hold in reserve to 21% from 21.5%. Mere tinkering.
The idea is to provide liquidity to the chronically dysfunctional financial system by lowering the price on existing dollar swaps by half a percentage point, making it easier for banks to get access to dollars. Central banks have also agreed to supply liquidity in other major currencies if needed. Hitherto, euro zone banks have been struggling to raise dollars as the traditional sources of dollar funding - such as US money markets - have become extremely reluctant to make short-term loans to many European banks. Either that or they are simply asking too high a price to do so, immediately evoking fears that the 2007-09 credit crunch/economic crisis is about to repeat itself - but possibly on a far worse scale.
Not everyone was impressed. For Michael Hewson, a market analyst at CMC Market, “basically all they are doing here is quantitative easing on steroids” - which is fine as far as it goes, but “it does not deal with the underlying issues”. Similarly, the governor of the Bank of Japan, Masaaki Shirakawa, was quoted on the Dow Jones news agency as saying that this new initiative would only have a “limited impact” on the bigger economic problems unfolding in the euro zone - the European debt problem “can’t be solved by liquidity provisions alone”.
In other words, investors are fleeing the euro zone bond market and the sovereign debt crisis engulfing the continent could see countries collapse - not just banks.
Euro downgrade
Surely adding to the heat in the Brussels kitchen, on December 5 Standard and Poor’s rating agency announced that it had put 15 euro zone states on “credit watch” - not to mention the European Financial Stability Facility mechanism as well. The ‘watched’ countries include Germany, France, Austria, the Netherlands, Finland and Luxembourg, all of which currently enjoy triple-A status. This raises the dreaded possibility of debt contagion spreading from the ‘periphery’ of southern Europe to the core countries. For example, France could be downgraded by two notches, a potentially devastating blow for the second largest euro zone economy.
In explanation, S&P said the decision was triggered by the belief that “systemic stresses” in the euro zone “have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole”. These “stresses”, according to the statement, take the form of “tightening” credit conditions across the euro zone and “markedly” higher risk premiums on a growing number of euro zone sovereigns, including some that are currently rated triple-A.
Then there are the “high levels” of government and household indebtedness and the “rising risk of economic recession” in the euro zone as a whole - there is now a “40% probability” of a fall in output in 2012. An assessment shared by the Markit’s purchasing managers’ index (PMI) of activity, which dropped to 46.4 in November from 47.1 in October - any reading below 50 indicates economic contraction.
Just as importantly for S&P, there are the “continuing disagreements” among European policymakers on how to tackle the “immediate market confidence crisis” and in the longer term how to ensure “greater economic, financial and fiscal convergence” among euro zone members. Taking everything into account, S&P concludes that there is a “one in two chance” that those countries placed on “credit watch” would see their credit rating fall within 90 days, though there was an implication - or threat - that the downgrades could happen as soon as the weekend if the EU leaders gathered at Brussels failed to come out with anything convincing.
Unsurprisingly, S&P came under heavy fire for its decision - some even suggested that it was a nakedly political attempt to undermine the Brussels summit and drive a wedge between Europe and the United States. The chairman of the euro group, Jean-Claude Juncker, complained that S&P’s move was a “wild exaggeration” and “unfair” - whilst Christian Noyer, the governor of the Bank of France, said the rating agency’s views were “completely at odds with events”. His Austrian counterpart, Ewald Nowotny, perhaps suffering from a bout of paranoia, thought that the “timing and the content of this warning has a clear political context”.
But, totally unrepentant, Moritz Kraemer, S&P’s head of European sovereign ratings, offered the opinion that the European leaders’ efforts to date had been “hesitant” and “piecemeal”, and that “our experience with previous summits suggests that it is far from certain” that anything meaningful will emerge. Frankly, it is hard to disagree.
On the day that S&P issued its downgrade threat, Angela Merkel and Nicola Sarkozy were holding crisis discussions in Paris with the intention of cobbling together a plan which they could then present to the summit meeting on December 9. They would “take note” of S&P’s warning, we heard, and French foreign minister Alain Juppé explained that the Merkel-Sarkozy talks were “precisely the response to one of the major questions” asked by S&P: namely, the “insufficiency of European economic governance”.
Fiscal union
The ‘rescue plan’ for the euro, in so far as there appears to be one, revolves around the ‘Merkozy’ scheme for greater or even full “fiscal union” within the euro zone. Essentially, the Merkozy proposals are for a regime of automatic sanctions against any country which runs up a deficit of more than 3% of GDP; a so-called ‘golden rule’ built into each euro zone member’s budget forbidding them from running up a deficit, with the European Court of Justice acting to “verify” whether such a transgression had taken place or not; making sure that oppressed and downtrodden private investors are never again asked to take huge losses, as in Greece; bringing forward from 2013 to 2012 the replacement of the European Financial Stability Facility with the European Stability Mechanism, with decisions based on a “qualified majority”, as opposed to the unanimity currently required; and for euro zone leaders to meet every month as long as crisis continues in order to “discuss growth”.
At a joint press conference on December 6, Sarkozy sternly declared that things in Europe “cannot continue as they are” - it never hurts to state the obvious - and that the Franco-German desire was for a “forced march” aimed at “re-establishing confidence in the euro zone”. In turn, Merkel stated that the two countries were “absolutely determined” to maintain a “stable” euro and wanted to see “structural changes which go beyond agreements” - meaning changes to the EU treaty. Ideally, they both said, these “treaty changes” would be implemented by all 27 member states of the EU, but if that proved not to be possible - is the pope a Catholic? - then just the approval of the 17 states that have adopted the euro would be sufficient.
As for Eurobonds (or ‘stability bonds’) - a German red line - we were told that they have been ruled out as a solution, Sarkozy describing it as a “strange idea” premised on the notion that “harmonising the debt” would be beneficial for the EU. Of course, this represents a humiliating U-turn for the French government, given Sarkozy’s previous agitation for Eurobonds - fearful of what might happen to French banks, heavily overexposed as they are to Greek, Italian and Spanish debt, without the ECB acting as a lender of last resort. However, logically, any plan for fiscal union must as a necessity require active and expanded intervention by the ECB - Eurobonds or no Eurobonds.
Going by precedent, the chances of this “fiscal union” actually doing what it says on the tin - saving the euro - look slim indeed: more like another failure in a long history of failures. After all, we have had a near endless parade of ‘grand plans’ and ‘rescue packages’ which turned out to be nothing of the sort: a quick examination of the small print revealing that no real action was being undertaken. Just smiles and handshakes in front of the cameras. Therefore there is no particular reason to think the Merkozy plan will be the salvation of the euro; more like far too little, far too late. A sentiment reinforced by Sarkozy’s comment that EU leaders “must move quickly”, by which he meant that treaty changes should be “concluded” by March - a strange definition of “quickly”. Meanwhile, the credit markets and money supply is freezing up now.
IMF shift
The stakes are high. According to EU commissioner Olli Rehn, the “economic and monetary union will either have to be completed through much deeper integration or we will have to accept a gradual disintegration of over half a century of European integration”. Juppé struck an even darker tone, talking about an “existential crisis” for Europe” - one that could even degenerate into violent conflict. “We have flattered ourselves for decades that we have eradicated the danger of conflict inside our continent,” he remarked, “but let’s not be too sure.”
To stop the “disintegration” of the euro requires a lot of money, whether to recapitalise the banks or bail out ‘distressed’ countries. Supposedly, this was to come from ramping up the financial firepower of the EFSF/ESM - maybe to something in the region of €1.2 trillion, a figure that most serious analysts regarded as inadequate. But following a meeting of euro zone finance ministers last week it was admitted that the bailout fund would probably be only half as big as originally hoped for, at about €625 billion. Less than inadequate. As the crisis gets deeper, the ‘solutions’ are getting thinner.
Confronted by the ever diminishing bailout fund, Wolfgang Schäuble, the German finance minister, signalled a policy shift towards the International Monetary Fund - declaring that he was now “open” to increasing the IMF’s resources through a series of bilateral loans, thus reversing the stance Berlin took at the G20 summit at Cannes on November 3. In this way, it seems, the ECB can get more directly involved in protecting the euro via IMF interventions - but no Eurobonds, please: we’re German.
Some more details have emerged after The Daily Telegraph published a “confidential document” by Herman Van Rompuy, the European Council president, in which he backed plans for a “new fiscal compact” for the euro zone. The text called for “additional measures”, including giving the ESM a banking licence which would potentially allow it access to hundreds of billions of ECB liquidity, and the document argues that euro zone central banks, backstopped by the ECB, could step in to “ensure the IMF has sufficient resources to deal with the crisis through the provision of additional means” - like bilateral loans.
Mario Draghi, the new ECB president, has also hinted that the bank is ready to act more aggressively to fight the euro zone debt crisis - if the European leaders agree to stronger deficit and debt rules. Fiscal union would be the “most important element”, he said, and argued that a “new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration”; it would present a “clear trajectory for the future evolution of the euro area”. Acknowledging that credit had tightened “seriously” in recent months and that weakening economic growth “does not bode well”, Draghi informed the European parliament that the “most important thing for the ECB is to repair the credit channel”. He added that the ECB was particularly aware of the “continuing difficulties” for banks in raising capital. That is, the ECB will step up its bond-buying programme if the EU leaders commit themselves to a new fiscal pact or union.
Increasingly alarmed by the European crisis - unchecked it could tip the US economy into a full-on depression - treasury secretary Timothy Geithner said the US backed Germany and France’s plans to create a “fiscal union” and supported the “constructive” efforts of the IMF in backing the euro zone. But, of course, he refused to commit extra US money to the fund - we have our own problems, you know.
One thing is for sure: any “fiscal union” from above carried out by the Eurocrats and bankers (even if such a thing is possible, which is extremely doubtful) will require more attacks on the working class; more ‘balancing of the books’, more austerity drives. That has been made more than clear by the likes of Merkel, Schäuble, Rompuy and Draghi. Hence the Greek, French, Irish and Italian parliaments have approved another round of vicious, anti-working class, austerity measures - even if Italy’s welfare minister, Elsa Fornero, had the semi-decency to start crying (with shame?) at a news conference unveiling the latest attacks. Unlike the capitalist robot, Edna Kerry, who in a TV address on December 4 told the working class that the 2012 budget “will be tough” (on workers and the majority) because “it has to be”; therefore VAT will be hiked to 23%, a new household tax imposed, child benefit reduced and social welfare slashed even more.
In or out of the euro, with or without “fiscal union”, the only ‘solution’ on offer is to make the working class pay for the failings of capitalism.