Berlin delivers reluctant ‘solidarity’
Angela Merkels last-minute climbdown comes with strings attached, writes Eddie Ford. After the EU summit, the crisis rumbles on
Confounding some, Angela Merkel took a step back from the abyss at the ‘make or break’ June 28-29 Brussels summit and agreed at the very last minute to allow the European Union to use its bailout mechanism to directly recapitalise struggling banks. A massive climbdown by the Berlin administration without a doubt, and a substantial victory for the ‘Latin bloc’ of Spain, Italy and France - though how long they get to savour their success (will the markets remain convinced, once the post-summit euphoria has fizzled out?) is yet to be seen.
Prior to the summit, as our readers will recall, Merkel appeared to be hardening her position on bank recapitalisation. Any rescue money, we were told, dished out by the European Financial Stability Facility or the European Stability Mechanism (scheduled to replace the EFSF this month) can only be funnelled through the actual states themselves. Those are the rules. Governments in receipt of such monies would be “fully liable” for any payment defaults or costs incurred by reneging on the strict conditions attached to the loans. You have been warned.
Hence we had a succession of German government officials discounting the possibility of easing the rules governing access to the ESM and Merkel herself repeatedly emphasised that International Monetary Fund oversight and inspection of aid recipients was “non-negotiable” - the iron chancellor had spoken. Nor did she miss any opportunity, as everyone knows, to vent her adamant opposition to any form of “joint liability” or mutualised debt (ie, Eurobonds) - ‘over my dead body’ being the distinct message. At the very least, it was a distant dream only to be entertained after each individual euro member-state by the sweat of its own brow - and by screwing the working class - had finally balanced its books and achieved permanent fiscal rectitude.
But, of course, such a stance was unsustainable, politically and economically - no matter how pleasing it might have sounded to much of Merkel’s domestic audience or her allies in the Euro-bureaucracy. The essentially ad-hoc and dysfunctional arrangement, whereby Europe was lending money to the banks to save the sovereigns and to the sovereigns to save the banks, was steadily leading to predictable disaster. Even Merkel could see that. Countries suffering economic distress were being given financial ‘aid’ which just added to their overall indebtedness rather than alleviating it, and in turn increased the chances of a total economic meltdown - ie, Greece. Near madness, needless to say, but austerity economics and ‘fiscal consolidation’ was apparently the only route to salvation. Somehow the European leaders would muddle through if they gave that can a good hard kick.
Time was running out, however. Spanish government bond yields had reached the critical 7% mark by the afternoon of June 28, with every reasonable expectation that they would just continue to rise if no substantial agreement came out of the Brussels summit. Bankruptcy loomed, with the Spanish prime minister, Mariano Rajoy - the increasingly unpopular leader of the Popular Party - bluntly telling parliament, and the world, on the day before the summit that the country simply “can’t keep funding ourselves for long” at those levels of interest - end of the road.
As for Italian bonds, they were inevitably heading in the same direction, climbing at one point on June 28 to 6.29% - entering the danger zone again. Clearly, as the Brussels summit remained deadlocked, there was the possibility - no idle scaremongering - that the euro zone’s third largest economy, and the eighth biggest in the world, was about to tailspin downwards if Europe’s leaders did not work out a way to help lower Italy’s interest rates with immediate effect. Failure to do so would result in Rome begging for a bailout on the grounds that it was too big to fail - the euro zone would come crashing down with it otherwise. Unfortunately, though that is almost certainly true, it is also too big to bail out, especially when you consider that the EFSF/ESM coffers, as things stand now, only contain about €500 billion - chicken-feed when compared to the real size of the problem. Those commentators and analysts who actually went to bed late on June 28 feared the worst, and for good reason.
However, the Merkel administration blinked in the very early hours of June 29. Some reports say she was “stunned” by the unrelenting intransigence of the ‘Latin bloc’, taking brinkmanship to new heights. François Hollande, now comfortably bedded down in the Élysée Palace - and the de facto leader of the ‘anti-German’ alliance - made his intentions clear straightaway. He declared that he had come to Brussels purely in order to get “very rapid solutions to support countries in the greatest difficulty on the markets” despite the fact that they have “made considerable efforts to restore their public finances” - like Spain and Italy.
In retaliation, Mark Rutte, the Dutch prime minister - a key German ally, along with the Finnish government - came out in support of Merkel and announced that the only way Spain and Italy could emerge from the crisis was to “bite the bullet” of austerity and “reform their labour markets” (ie, introduce yet more attacks on the working class) - there would be no direct help from the EU, no deviation from Plan A. But the ‘Latin bloc’ leaders would have none of it and demanded “solidarity” from Germany and insisted on the use of bailout funds to buy new Spanish and Italian bonds to ease borrowing costs at debt auctions over the summer. If not, they threatened - arms crossed - they would “block everything” unless Germany and other euro zone countries acceded to their calls for immediate help.
For instance, the Spanish and Italian leaders were prepared to torpedo the flagship €120 billion “growth pact” if they did not receive a commitment to underwrite Italian and Spanish bonds. Overt blackmail, as the markets would have plunged like a stone first thing in the morning on July 2 if literally nothing - not even worthy platitudes - had come out of the summit. Potential catastrophe loomed in the shape of runaway bond yields and bank runs, and just about anything else your imagination cared to conjure up. Merkel knew that and the Latin bloc leaders knew that she knew that - checkmate.
Trying to put a positive spin on events, Hermann Gröhe, the general secretary of Merkel’s Christian Democrat Union, said in an interview on German breakfast television that Merkel had pushed through her maxim of “no liability without oversight”. Direct ESM aid to banks will only be allowed, he continued, once the right and proper oversight authority is established at the ECB. Yet in reality though, this must be quite a small consolation prize for the Merkel government.
So from now on, or so we gather from the official statements and declarations, euro countries which fulfil the budgetary rules laid down by the European Commission can receive aid without agreeing to tough additional austerity measures. Strict monitoring by the EC, ECB and IMF troika - the sort imposed on Greece and Ireland - will no longer apply. More concretely, under the deal Spanish banks will be recapitalised to the tune of some €100 billion, which will be “very rapidly taken off balance sheet” - or erased - and directly loaned to banks once the ECB finally takes over as the single currency’s banking supervisor.
Theoretically, this could happen by the end of the year, but the odds are that it will take up to two years instead. Just as importantly, if not more so, the new ESM loans will not be given seniority - assuming we believe what we read - thus giving extra security to Spain’s private creditors. Those creditors had been seriously spooked by the prospect of playing second fiddle to the euro zone bailout fund if for any reason the debt had to be ‘rescheduled’ - a turn of events that would significantly increase their exposure to risk. Of course, the converse of this is that euro zone taxpayers - especially German taxpayers - are now as much at risk as private creditors when it comes to the Spanish bank bailout. An extremely sensitive subject politically, it need hardly be said, for the Merkel government.
Furthermore, and perhaps more controversially, a commitment (a promise?) was also made to “examine the situation of the Irish financial sector” - offering up the tantalising prospect that the Irish government might get some sort of relief on its crippling debt burden. In which case - questions, questions - what happens to the countries such as Portugal and Greece that have already received money from the temporary EFSF? Brussels officials have issued terse statements saying that the new deal signed on June 29 “does not change anything” about the troika-dictated programmes for Greece, Portugal and Ireland, and Merkel - hardly surprisingly - has asserted that the decision to waive the preferential treatment for the bailout fund when it came to the Spanish rescue was a “one-off” that would not be repeated in any further programmes. All the agreed plans and goals will continue to apply and be monitored by the troika.
But, then again, Merkel also said the bailout fund would never be used to directly recapitalise ailing banks - yet now that is precisely what will happen - unless the Brussels summit was nothing more than a gigantic con trick. That being the case, it is more than possible that the members of the bailout club might start clamouring for the terms of their respective deals to be relaxed or renegotiated - which is certainly the position of the new Greek coalition government headed by Antonis Samaras. Awaiting an ‘inspection’ by troika officials on July 4 in order to determine whether the country qualifies for the next tranche of bailout money totalling €31 billion - and thus avert immediate bankruptcy - a government spokesman said on Greek TV a day earlier that “we will present information that is astounding” and will demonstrate that in their “current form” the austerity measures demanded by the troika are “hopelessly counterproductive”. Doomed to failure. Reconsider, Berlin - and IMF - just like you did with Spain.
Reflecting a sentiment common in the German press and society as a whole, Spiegel Online carried an article saying that Italy and Spain “broke the will of the iron chancellor” at Brussels by “out-negotiating her” in the early hours of June 29. The truth is, continued the piece, the German government “caved in” to demands for “less stringent bailouts” and direct aid to banks”. Other cruel though not entirely inaccurate headlines in the German press were “Outfoxed by Club Med”, “German dominance in doubt after summit defeat”, and so on.
Things will certainly not be plain sailing for Merkel following the Brussels summit. One possible fly in the ointment will arise when the German constitutional court decides on July 10 whether to grant a temporary injunction against German laws on the fiscal pact and the ESM - even though both deals have been approved by the German parliament. It is not entirely impossible that as a consequence the start of the ESM could be delayed. More seriously, the Bavarian governor, Horst Seehofer, the leader of the Christian Social Union - the CDU’s sister party - has strongly criticised the outcome generated by the Brussels summit in an interview for the Stern magazine (July 3). He threatened to let the government collapse if Berlin makes any further financial concessions to ailing euro member-states, reminding Merkel - not that she really needs her mind jolted on this matter - that the coalition “has no majority” without the CSU’s parliamentary seats.
Seehofer was also incensed by a suggestion mooted by the German finance minister, Wolfgang Schäuble, that the country should countenance holding a referendum on a “new constitution” that would effectively relinquish fiscal and budgetary powers to Brussels, as tentatively agreed at the summit. “Hands off our constitution!” he retorted - thanks to this constitution, Germany has had the “most stable state” and the “most stable democracy” there has ever been, and he would not accept the transfer of major powers to a “European monster state”. If absolutely necessary, he would turn the next general election and the Bavarian regional election - both scheduled for 2013 - into a vote on Europe: “We will put this question to the people”. There have also been grumblings of discontent from within the CDU itself. Wolfgang Bosbach, a consistent critic of the ESM and the party’s deputy parliamentary group leader since 2000, has openly worried about the currency union widening dangerously to become a “liability union” - which in turn will become a “transfer union”, with euro members continuing to merrily “violate deficit rules”.
The plain fact of the matter is that the euro crisis continues, even if immediate calamity has been avoided - we are not out of the woods yet. There is now intense speculation in the financial press and beyond that Slovenia may become the sixth euro member to seek a bailout. Janez Janša, the Slovenian prime minister, declared on June 27 that the country risks facing a “Greek scenario” and Michal Dybula - a senior economist at the BNP Paribas banking group - said it was “increasingly likely” that Slovenia would be the next euro country asking for a bailout to prop up the banking sector. Slovenia’s predicament seems to stem from the financial difficulties currently being experienced by Nova Ljubljanska Banka, the country’s largest bank, after KBC - a major Belgian bank that owns 25% of NLB - abandoned plans to buy new shares in a deal which would have provided funds for recapitalisation. The rest of NLB is state-owned and the country, already weighed down by a large and growing national deficit, is now finding itself unable to fund the recapitalisation effort. Hence the crisis.
Meanwhile, the grim economic data keeps rolling in. Unemployment in the euro zone area hit 11.1% in May - making a total of 17.56 million people out of work, the highest level since records began in 1995. The rate across the wider EU also rose to 10.3% in May from 10.2% in April. Youth unemployment also climbed again, with another 282,000 young people (under 25) out of work across the EU compared with a year ago - including 254,000 within the euro zone. That pushed the youth unemployment figure up to 22.6% in the euro zone and 22.7% across the EU, meaning overall that there are now more than five and a half million young people unemployed in the EU, of whom 3.4 million are in the euro area. Of course, the youth jobless data shows the deep divergences between the countries which make up the euro zone. Germany can boast the lowest youth jobless rate at just 7.9%, followed by Austria at 8.3% and the Netherlands with 9.2%, whilst - no prizes for guessing - the situation is bleakest in Spain and Greece, with 52.1% each. At the same time, the downturn in the euro zone’s manufacturing sector continued apace. Markit’s purchasing managers index was stuck at 45.1 in June - its lowest reading for three years (any reading below 50 indicates economic contraction).
As for the powerhouses, China and the United States, they are both slowing down - causing widespread alarm. Figures released this week revealed that China’s manufacturing activity expanded at its weakest pace for seven months in June, despite government attempts to arrest the slowdown. So the country’s PMI fell to 50.2 last month from 50.4 in May, according to statistics produced by the China Federation of Logistics and Purchasing.
Even more worryingly for European leaders, US manufacturing activity contracted for the first time in three years. A survey on the US industrial sector carried out by the Institute for Supply Management reported a large decline in activity from 53.5 in May to 49.7 in June - outright contraction and its lowest level since the recession formally ended in mid-2009. In fact, as part of its annual health check of the US economy (the ‘article 4 report’) for 2012, the IMF added its voice to those (including Federal Reserve chairman Ben Bernanke) warning that the seemingly endless deadlock on Capitol Hill is “jeopardising” the US economy. Describing the US recovery as “tepid”, the IMF report urged Washington’s warring politicians in Congress to stave off drastic spending cuts and tax rises due to take place in 2013 because they might send the economy tumbling over a “fiscal cliff”.
But for communists the biggest danger - and objection - associated with the euro zone, and the EU as a whole, is the gaping democratic deficit. Naturally, the rightwing and left nationalist press, such as the Morning Star, is full of wild talk about a German takeover of Europe. On one level there is mere chauvinist nonsense, but on another there is a truth to such claims. The EC plans presented at the Brussels summit for a “banking union”, fiscal integration, greater centralised control, etc - a sort of bureaucratic United States of Europe - would in reality, if they ever came to fruition, see the strongest euro zone country managing things; and that country is ‘democratic’ Germany. By definition, Germany and the Euro-bureaucracy based in Brussels would have the power to override the decisions taken by individual member-states - and indeed would have to do so in order to enforce all the targets laid out in the fiscal pact, etc.
But, if things are really run from Berlin, what if people vote the wrong way - like they almost did in Greece on June 6, Syriza only losing by a few percentage points? If Alex Tsipras had become prime minister, as some sections of the left foolishly wanted, then Greece would have been booted out of the euro and probably the EU itself. Under such anti-democratic conditions, which more or less render elections irrelevant, the EU will lose moral legitimacy and become purely associated with austerity and suffering l