Planless G8 leaders face abyss
Angela Merkel and the European Central Bank seem determined to resist calls for Eurobonds and a 'Marshall Plan'-style stimulus package, says Eddie Ford
With Greek voters decisively rejecting austerity and ‘fiscal consolidation’ in the May 6 parliamentary elections and set to do so again on June 17, the crisis in the euro zone is bound to escalate - whichever party manages to come first in that country or whatever government finally emerges. A Greek exit from the euro/European Union, which may be only months away, could be messy. Contagion could spread to Portugal, Spain and - most dreaded of all - Italy, the euro zone’s third largest economy.
After all, Spain has given us an intimation of the future in recent weeks - having a banking system riddled from top to bottom with toxic debt generated by the dramatic, though eminently foreseeable, collapse of the housing bubble in 2009. On May 17 Moody’s rating agency downgraded 16 Spanish banks, not to mention four regions and Santander’s UK arm. The same day the Spanish newspaper El Mundo reported that over €1 billon had been withdrawn from Bankia, the country’s fourth largest bank, since it was partly nationalised on May 9.
Naturally, this sparked a panic amongst both investors and ordinary savers about a bank run and at one point during the day the bank’s shares plummeted by almost 30% - the abyss beckoned. Terrified, Bankia’s chairman issued a hasty statement to the Madrid stock exchange claiming that clients could be “absolutely calm” about the security of the savings they have deposited. Spain’s economy minister, Fernando Jiménez Latorre, also declared that the bank was “not suffering” from a massive outflow of deposits. Do not panic. We are in control. There is no bank run, do you hear?
Bankia and the Spanish government just about survived the day, which can be a very long time when you are in the middle of a catastrophic economic/fiscal crisis. But the real fear, of course, is that a Greek ejection from the euro would lead to bank runs all across Europe - including France, which is heavily exposed to Greek debt. And in turn UK banks, for example, are exposed to French debt. Great fleas have little fleas upon their backs …
Interestingly, the Greece paper Kathimerini carried a relatively lengthy article on May 23 arguing - quite cogently - that an exit from the euro would need to be squeezed into a 46-hour window; that being roughly the amount of time the country’s leaders would have to ‘organise’ or ‘control’ any departure from the single currency while global markets are largely closed from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand. Hence we read that during this hypothetical weekend - though watch this space closely - Greece would need to freeze bank accounts, put troops along the borders to prevent a capital flight and start stamping existing euros to work as a new currency whilst drachma notes are being printed and then reintroduced. Of course, Greece’s banks could well be shut down for several more days after that. Now, how do you think the markets would react to that?
Given these circumstances, therefore, you do not need a particularly lurid imagination to envisage the effective collapse of the entire euro project. Eurogeddon. Nor necessarily have to be a fantasist to think that a near automatic corollary of such a scenario would be a series of worldwide bank runs, failed states - this time in Europe and not Africa - and a global slump/depression potentially more devastating than the 1930s. The United States, for all its mighty dollar and even mightier military, would not be immune from such an economic tsunami and would inevitably get dragged down into the mire. Not even China would be able to come to the rescue of capitalism - a truly deluded notion.
With storm clouds gathering over Europe, world leaders congregated at picturesque Camp David for the G8 summit on May 18-19. The EU was represented by the presidents of the European Commission and the European Council, respectively José Manuel Barroso and Herman Van Rompuy.
So what was agreed? A radical plan of action to avert disaster engulfing an already recession-hit Europe? Forget it. Rather, they essentially agreed to do nothing but just kick the euro can a little bit further down the road, as if June 17 was years away or Spain’s creaking banking system will magically revive itself in a Harry Potter moment. The G8’s profound inaction is in many ways a near perfect summation of the capitalist ruling class in this period - no ideas, no strategy.
True, the summit has been widely touted as a “victory” for Barack Obama and the new French president, François Hollande - the proponents of fiscal stimulus, as opposed, or so the story goes, to the unbending advocates of austerity like Angela Merkel and her allies in the European Central Bank and the Brussels euro-bureaucracy. Thus we are supposed to take comfort from the assertion made in the final communiqué that “our imperative is to promote growth and jobs” and “welcome the ongoing discussion in Europe on how to generate growth”. Presumably, we are also supposed to be reassured by the G8 leaders’ little homily about how important it is to “boost confidence” and “nurture recovery” within a “sustainable, credible and non-inflationary macroeconomic framework”. Hollande in a separate statement stressed the need to pursue “two goals simultaneously” - ie, “budgetary solvency and maximum growth”. A splendid aspiration, no doubt.
But where are the concrete details and proposals to stimulate growth? Where exactly are the pounds, euros and dollars to come from in order to finance this Obama-Hollande vision - if indeed it is deserving of such a description. Nowhere to be found, no matter what language you read it in. Instead we have to make do with the stunningly banal observation that the “right measures are not the same for each of us” - a triumph of diplomatic fudge, producing a formula intended to please everyone but in reality pleasing nobody. Ditto for the Panglossian remark about how the global economy “shows signs of promise”, even if “significant headwinds persist”. The more expert decoders of international diplomatic-speak (‘summitese’) amongst our readers would, of course, note the distinctly Merkelesque-sounding commitment in the final communiqué to “maintaining a firm commitment to implement fiscal consolidation to be assessed on a structural basis”. No deviation from austerity and the Fiskalpakt, in other words.
More critically still, what about Greece? Only the manufacturers of rose-tinted glasses would be consoled by the G8’s honeyed words to the effect that “we affirm our interest in Greece remaining in the euro zone while respecting its commitments”. Meaning that the Greek government, irrespective of its political composition or programme post-June 17, must stick to the utterly onerous terms and conditions of the bailout imposed by the EC, ECB and International Monetary Fund troika. “Commitments”, that is, that the Greek masses regard with increasing contempt - as they do all those who attempt to enforce austerity upon them, bringing nothing but misery and destitution.
Someone like David Cameron, for instance. Speaking at the Nato summit in Chicago on May 20, he delivered an ultimatum to the Greek people - accept austerity or leave the euro zone; although hypocritically he remarked that “it’s not for me to say what Greek parties should and shouldn’t stand on and how the Greek elections should work”. And despite the fact that the majority of Greek people have no isolationist desire to see the return of the drachma or pull out of the EU. However, Cameron was insistent that the “choice” Greece faces - do you prefer the fire or the sword? - is between, on the one hand, “maintaining its commitments and maintaining itself in the euro zone” and, on the other, “deciding that is not the path it wants to take”. This, he declared, is a “moment of clarity”. Sentiments he repeated to parliament on May 23: that the second election must be treated as a referendum on Greece’s future in the euro zone. So vote accordingly on June 17.
On the same day the Bundesbank, in line with Cameron’s views, issued a stern statement warning Greece that it would be putting any future financial aid at risk if it elected the ‘wrong’ government. A “significant dilution of exiting agreements”, we hear, “would damage confidence in all euro area agreements and treaties and strongly weaken incentives for national reform”. Seeing how the system of euro zone central banks had assumed “considerable risks” by providing Greece with large amounts of liquidity, the ungrateful Greek electorate “should not significantly increase these risks”. Clearly the ECB has cast its June 17 vote early.
Meanwhile, establishment voices in Brussels and elsewhere have been trying to convince us that the euro zone has sufficient firewalls in place to protect the currency and prevent contagion if Greece goes down the tube. But they are fooling nobody - probably not even themselves.
Following G8, the European leaders decamped to Brussels on May 23 for a supposedly ‘informal’ meeting - though more like an emergency summit, in reality. This was heavily billed as a showdown or political war over Eurobonds (collective borrowing/mutualised debt) between Germany and the emerging ‘Latin bloc’ of France, Italy and Spain. According to Italian prime minister Mario Monti, Hollande’s “entry into the game” had changed Europe’s political dynamics; he, for one, now had an ally “on the same wave-length”. Now let’s build the ‘resistance’, infers the Italian prime minister, to Germany and the fiscal hawks within the ECB and the EU - by forming a “growth pact” as a counterweight to the fiscal compact that seeks to eternalise austerity economics.
In short, Hollande proposes an infrastructure blitz - a sort of new fiscal Marshall Plan - financed by Eurobonds so as to revive economic confidence. He claims to have supporters within the belly of the European Commission beast itself, like José Manuel Barroso. Hollande told reporters after the G8 summit that he would outline his growth proposals at the May 23 meeting: “within this packet of proposals there will be Eurobonds and I will not be alone in proposing them”. Apparently, Hollande had “confirmation” of this whilst enjoying bracing walks through the Catoctin Mountain Park and so on. In the opinion of the Financial Times, the “resurrection” of Eurobonds is the “latest sign” that Hollande’s election has “shifted the terms of the euro zone crisis debate” and also “reflects the growing belief among some leaders that instability in Greece necessitates revisiting the crisis procedures to ensure they are sufficient to deal with a Greek euro zone exit” (May 21).
Lending his support to the Hollande-Monti ‘agenda’, Herman Van Rompuy has appealed to European leaders to come out with and agree “specific steps” to stimulate growth and create jobs across the EU - in sharp contradistinction to the empty, platitudinous statements emanating from Camp David. No more kicking cans down roads; those days are over - perhaps. Measures outlined so far include boosting the paid-in capital of the European Investment Bank and plans for ‘project bonds’ - enthusiastically touted by Hollande during his election campaign - which would be underwritten by the EU budget to finance infrastructure.
Another idea prominently put forward by Bruegel, the Brussels-based think tank, would involve mutualising all debt up to 60% of GDP, with any over and above that limit having to be underwritten by the specific country alone. Furthermore, it was expected that the May 23 ‘summit’ would discuss allowing the European Financial Stability Facility/European Stability Mechanism - currently holding a war chest of approximately €700 billion, to take the most generous estimate - to help recapitalise banks directly rather than lending to individual countries for them to pass on loans to the respective banks as required. The aim, by some accounts, is to hammer out a coherent set of proposals that can be formally signed at the next summit on June 28-29.
Inevitably, the core ideas of the ‘Latin bloc’ have run into swift and bitter German opposition, adamantly maintaining that it is up to individual member-states to ensure the stability of their banking sectors. For the German political-fiscal establishment it was impermissible for that ‘stabilising’ function to be allotted to the ECB or, god forbid, the Bundesbank - over our dead bodies. Reiterating Berlin’s position, Steffen Kampeter, a top German finance ministry official, pronounced the Hollande scheme for Eurobonds to be the “wrong medicine at the wrong time with the wrong side-effects”. Fully endorsing Kampeter’s remarks, Germany’s representative on the ECB, Jörg Asmussen, reminded Hollande that the fiscal pact “cannot be renegotiated or softened” - just obeyed and implemented.
Adopting an even more inflammatory tone, Thilo Sarrazin, previously a Bundesbank board member and author of a bestseller denouncing Germany’s post-war multiculturalist immigration policy, described Eurobonds/stability bonds as a form of “penance” for World War II. Part of the unjust collective punishment of the German nation. Joining the battle too, Austria’s finance minister, Maria Fekter - the Germanic bloc? - simply regarded Hollande’s growth recipes as “nonsense”. She commented: “Growth financed by debt? Those are the recipes from the day before yesterday.” No deviation from the course of ‘fiscal consolidation’ and ‘labour reforms’ will be tolerated.
The plain fact of the matter is that the Merkel administration is unlikely to yield - or blink - when it comes to either Greece or the fiscal pact, especially after the trouncing the ruling Christian Democratic Union got in the key North Rhine-Westphalia regional elections on May 13. Trying to secure a third term in office, she is fully aware that any notion of Berlin carrying the can for others’ debt - particularly those ‘lazy’ southern Europeans - is a near certain vote loser. Yet to remain on the same hubristic course threatens to bring the euro zone crashing down around the ears of Angela Merkel and co, inside or outside the euro zone.