27.06.2012
Haunted by danger of collapse
Another week, another summit. Yet, writes Eddie Ford, with five euro countries now members of the bailout club and Germany declining to foot the bill, there is a distinct danger that the euro will collapse
This week saw a rash of yet more conferences and summits, surely an ominous sign. On June 26 there was the evening ‘mini-summit’ in Paris of the finance ministers of Germany, France, Italy and Spain - the 20th such discussion since the financial crisis broke out anew in early 2010. Apparently, the euro zone’s top four members met in order to “resolve their differences” ahead of the June 28-29 European Union summit in Brussels.
However, by most accounts, the finance ministers’ session - far from being a magnificently dignified rallying of the troops - was called at very short notice in an unseemly rush to repair the damage caused by the semi-public rift between Angela Merkel and the leaders of the other three euro states when they briefly met in Rome the previous week. So in reality just another meeting about a meeting. And, as I write, there does not appear to have been any sort of statement or news conference following the talks - hardly suggesting that we are about to see a breakthrough or bold step forward.
Then, on June 27, François Hollande and Merkel held “very important” eve-of-summit bilateral talks at the Élysée Palace. This meeting too appears to have been hastily arranged. Indeed, there was a whiff of desperation about it, as the differences between Paris - along with the majority of other euro countries, as well as the United States administration - and Berlin become all too apparent. In short, Hollande wants to see the introduction of measures like mutualised/collectivised debt (aka Eurobonds) and joint bank deposit guarantees, whilst working towards greater fiscal integration, but Merkel is insistent that there has to be a cast-iron agreement on much closer political and financial integration before any other steps are taken. Until then, as the German finance minister, Wolfgang Schäuble, commented, schemes like Eurobonds are for the “distant future” (June 5). Dream on, François.
In fact, in the run-up to the EU summit, Merkel seems to have hardened her position over Eurobonds - perhaps feeling angered by the two attempts to ambush her at the G20 Mexico summit and then Rome. On both occasions the US and UK governments - in cahoots with the leaders of France, Spain and Italy - sought to press-gang Merkel into paying for various fiscal stimulus and bank recapitalisation policies (or adventures, as some would see it) in a bid to reduce the crippling rates of interest that increasingly vulnerable euro zone members like Spain and Italy currently have to pay on the open markets in order to finance themselves (by issuing government IOUs, etc).
Therefore we read that on June 26, during a supposedly closed meeting with MPs from the Free Democratic Party, Merkel’s junior coalition partner, she was met with rapturous applause when she declared that Europe would not have pooled debt liability “as long as I live”; or, as The Daily Telegraph mischievously sub-headed it, “Eurobonds? Over my dead body, Merkel tells MPs” (June 26).
In other words, Merkel is refusing to take out the Berlin credit card to write off the debts generated by other countries’ financial ‘profligacy’ - a message she repeated the next day, albeit a little more tactfully, when she addressed the Bundestag. She reminded her audience that Eurobonds were “constitutionally impossible” in Germany, as well as being “economically wrong” and “counterproductive” - and if Germany did become “overburdened” in this way, taking on the debts of countries like Greece or Spain, it would have “unforeseeable consequences” for Europe as a whole. The only conditions under which Germany would consent to the notion of “joint liability” (Eurobonds), she emphasised again, is by the creation of an environment where “sufficient supervision is ensured” - essentially meaning that the other euro countries will have to cede control of fiscal policy to Germany/Brussels/the European Central Bank.
But without a Franco-German deal of some description, the prospects of anything meaningful, as opposed to more fine words and flummery, emerging from the Brussels summits looks even less likely - and expectations were not exactly high to begin with. Expressing the dominant mood amongst investors, Paul Donovan - managing director of global economics at the UBS banking group - stated that the “markets are waiting for nothing to happen” between June 28-29, though there is the perverse chance that they may “react positively” to any sign of leadership from Brussels, precisely because nobody believes that the planless EU leaders will come up with anything at all. Alternatively, and much more probably - at least in the opinion of Donovan - the markets, as another summit drearily comes and goes, will simply lose patience with the never ending “travails of the euro” and deliver a harsh verdict: ie, Spanish and Italian government bond yields will start to inexorably soar just like they did last week and are now beginning to do again.
Catastrophic
Clearly though, the current situation of political deadlock cannot last much longer - whether we are five minutes or one minute to midnight will be decided by later historians. What is beyond doubt, except for those with an incurably Panglossian outlook, is that the euro is in distinct danger of busting apart in the near future, with catastrophic consequences for the world economy - possibly plunging us into 1930s territory. Summing up this apocalyptic sentiment, Mario Monti, the technocratic prime minister of Italy, declared on June 22 that EU leaders had a “week to save the euro” - Weekly Worker readers will know by the time they read this whether his prediction has come true or not.
However, Monti’s overall prognosis for the currency, and the euro zone bloc as a whole, is perfectly sound - namely that without a “successful outcome” at the Brussels summit there will be “progressively greater speculative attacks on individual countries”, combined with the “harassment of the weaker countries”. This means that a “large part” of Europe would have to “put up with very high interest rates”, which would “impact on the states and also indirectly on firms”; which, of course, is the “direct opposite of what is needed for economic growth”.
As for the political ramifications, Monti stressed, they will be considerable if the Brussels summit turns out to be a damp squib. Failure would mean that the “frustration of the public towards Europe would grow” and this would create a vicious circle: to “emerge in good shape” from the crisis “ever more integration is needed”, but the chronic inability of the EU leaders - and others - to resolve the problems ensures that not only “public opinion” but also “governments and parliaments” will eventually “turn against that greater integration” required for that very survival. He cited the “traditionally pro-European” Italian parliament as an example - Silvio Berlusconi having acknowledged that his Popolo della Libertà party has bled support due to its former backing for the government’s hugely unpopular austerity measures and now openly speaks of torpedoing Monti’s technocratic cabinet and reintroducing the lira.
Confronted by massive problems, with the euro clock loudly ticking, you would not think that any more urgency would be required by the leaders at Brussels - even if only to maintain their physical existence as a viable political class. Extra impetus, however, could be gained by looking at Cyprus, which on June 25 finally threw in the towel and became the fifth euro zone country to formally request a bailout for its distressed banks after being turned away by both China and Russia - the latter having kept the country afloat since November, but now tiring of this commitment.
In a terse statement, Nicosia said it required assistance, following “negative spill-over effects” throughout its entire financial sector due to large exposure to the toxic Greek economy. Cyprus has been shut out of the international capital markets for more than a year, with the yields on its 10-year government bonds over the 16% mark as of June 26 - spelling utter economic ruination without dramatic action. Government officials admitted that in the end they may need a bailout of up to €10 billion, over half the size of its official economy (ie, €17.3 billion). To complete the grim picture for the EU leaders, most analysts expect - not that you particularly have to be a genius to work it out - that Greece and Spain will have to get on their knees again soon and plead for further bailouts. Maybe as early as next month. Then who next - Italy?
Yes, just about every summit over the last two years has been billed - almost tiresomely - as a ‘make or break’ affair. No going back. And so on. Then everything carries on as before. But the prospects of a euro meltdown have never been greater and without something being done - and quickly - all that may be left for further EU summits to do is just pick up the pieces and sing a lament for the former currency known as the euro.
Banking union
The drift towards disaster is unmistakable. Thus we are not too astonished to read that Herman Van Rompuy, president of the European Council, significantly watered down plans to “reshape” the euro zone, or that the seven-page draft document released by the EC at the beginning of this week is significantly less ambitious than the 10-page version leaked to various media outlets at the end of last week. According to the Financial Times, the original, more “detailed” document urged euro zone leaders to use the European Financial Stability Facility/European Stability Mechanism bailout funds - roughly calculated at between €500 and €750 billion - to immediately recapitalise European banks; it also contained other measures to directly address the current crisis. However, as the FT notes, the draft that appeared on the EC website contained far fewer concrete details and, perhaps even more critically, suggests “no timetable for implementation” - so expect more fudge and evasion (June 26).
For what it is worth, and we shall soon find out, the document was drafted by the ‘gang of four’ - the quartet of European presidents/bureaucrats: Van Rompuy, Mario Draghi of the ECB, José Manuel Barroso of the European Commission and Jean-Claude Juncker of the euro group. It calls for a “quick start” on establishing a new European banking union, says that the ECB could be given “supervisory authority” over EU banks and proposes “common resolution funds” (for winding up bad banks and funded by a banking levy to spare EU taxpayers), as well as a “common deposit guarantee scheme” for Europe’s ordinary savers. Some rather excitable rightwing commentators, not to mention the Morning Star, are trying to portray the document as an “incendiary” set of proposals for a fully-fledged political federation that would transform the euro zone into a United States of Europe - even a ‘Fourth Reich’.
Naturally, the UK government - to name but one - has reacted with venom to the draft document’s quite logical stance that banking union should extend beyond the euro zone. Under no circumstances, David Cameron protested, will he allow the UK’s pride and joy, the jewel in the crown - the parasitical City - to be placed under the authority of the ECB. Rather, he argues, any banking union - if there has to be one at all - should be a “purely” euro zone matter to deal with internal problems - as he sees it. Therefore Cameron will demand “safeguards” to quarantine the City from dastardly foreign control and “guarantees” that any new financial/fiscal regime within the euro zone does not “impair” Britain’s national interests in the EU single market.
Needless to say, the more prosaic reality is that the draft document proposals now under discussion at the Brussels summit - generously presuming that it does not get discreetly dumped in the bin further down the line - will take at least a decade to come to fruition: time that the EU leaders and Eurocrats simply do not have. There is next to no chance that the markets will be placated by the lofty, but thoroughly intangible schemes. Nor will the working class - resistance will escalate in some form of another, whether by the ballot box or other means.
Meanwhile, pressure is building up on Spain again - which has now formally requested assistance of up to €100 billion for its struggling banks, though the exact figure is still unknown pending a full audit. Bond yields rose steeply again as the week started and by June 27 had reached 6.99% at one point - before finishing the day at around the 6.85% mark. Italy, in turn, was back over the dangerous 6% level - climbing on June 27 to 6.13%.
The precipice dangling before him, Mariano Rajoy, the Spanish prime minister, gravely informed parliament early on June 27 that the country “can’t keep funding ourselves for long” at this price. We will just go bankrupt. In response, the euro group declared that Spain will get the funds from the EFSF until the permanent ESM bailout fund is active - that was the good news. The bad news, however, is that the Spanish government will be “fully liable” for any funds distributed to it from the euro zone rescue facilities.
Making it surely only a matter of time, barring a miracle, before an acute banking crisis becomes an even worse full-on sovereign debt crisis.