Euro–zone
leaders find themselves buffeted
by a crisis they cannot
control
How much closer a
union?
By
Charlemagne
The Economist, July 30th 2011
The euro zone is moving closer towards
an uncertain fiscal union
At
the emergency meeting of euro–zone leaders on July 21st
Jean–Claude Trichet, president of the European Central Bank,
circulated a set of charts showing how bond spreads had blown
out after every summit over the past year. He also handed out
a ranking of countries deemed by markets most likely to
default: Greece, Portugal and Ireland were at the top, riskier
than Venezuela and Pakistan; Spain was less safe than
revolutionary Egypt. Mr Trichet’s point was clear. The
response to the crisis had been inadequate and often made
matters worse, with markets seeing Europe as more of a basket–case
even than Africa.
The
leaders were determined to reverse this grim trend. So they
agreed to slash interest rates on bail–out loans for the
most crippled members, and to double their maturities to 15
years (and, if need be, be ready to double them again, to 30
years). The summit promised to keep up the subsidies until
Greece could return to the market. Ireland and Portugal got
the same terms. Greece’s private creditors were asked to pay,
but only a bit.
To
limit contagion, the leaders gave enlarged powers to the
European Financial Stability Facility (EFSF) to extend
short–term loans, recapitalise banks and buy bonds of
troubled sovereigns in the markets. To France’s delighted
president, Nicolas Sarkozy, this was the birth of a European
Monetary Fund. The markets were pleasantly surprised, even
euphoric for a while. Finally, said some analysts, euro–zone
leaders were taking the bold steps required. But those taking
off on their summer holidays would be wise not to switch off
their mobile telephones. Spain and Italy, in particular, have
been wobbling yet again this week.
The rescue of Greece is a necessary
first step, but it will not end the crisis
The
rescue of Greece is a necessary first step, but it will not
end the crisis. Despite everything, the summit did too little
to lighten Greece’s debt burden, given the political fury
and market turbulence caused by demands for private–sector
participation. Leaders say they will do “whatever is needed”
to save the euro. But what is needed? The options are hard or
costly. More money may be wanted for Ireland and Portugal.
Many think the EFSF, to be credible, should be doubled or
tripled in size. But at some point throwing in money will
raise doubts about the creditors. Can enfeebled Italy and
Spain afford to pledge tens of billions of euros more? How
long before France’s AAA rating is at risk?
For
some, the time has come to address the underlying design flaw
of the euro: a single currency with many different states.
Even the sceptical British say that the “remorseless logic”
of monetary union is greater fiscal union. Mr Sarkozy sees an
opportunity to achieve his vision of “economic governance”,
with regular summits of the euro zone’s 17 leaders producing
a more integrated economic policy and progressively breaking
away from the wider EU of 27. “I am a federalist,” Mr
Sarkozy told his colleagues. In joining the euro, countries
had to surrender some sovereignty. That such views should be
expressed by a former Gaullist, at a time when the EU is
unpopular, was perhaps a surprise.
In
truth, Mr Sarkozy is trying to amplify France’s voice in a
smaller core that excludes pesky liberals like the British,
Swedes and Poles, and gives greater weight to France’s
Mediterranean allies. Europe at 17, he thinks, really means
Europe à deux, with Mr Sarkozy as co–regent alongside
Angela Merkel. The German chancellor has tried to resist this,
but has relented as the crisis has deepened. Her priority has
been to push weaker countries to be more Germanic through
reforms to improve their competitiveness. To get some of this,
she agreed earlier this year to summit meetings of a
“euro–plus” group of the 17 euro members with others
ready to abide by the same strictures.
Now
Mr Sarkozy wants to push this bargain a stage further. He
seems to have the backing of Herman Van Rompuy, president of
the European Council (representing leaders), who stands to
gain at the expense of the European Commission (the EU’s
civil service) and the finance ministers, the crown princes of
the EU. An idea proposed by Mr Trichet may gain strength: the
creation of a “European finance minister” to oversee
economic and budgetary policies, supervise the financial
sector and represent the euro abroad. Alas, for advocates of
the notion, the experiment of an EU “foreign minister” has
hardly been a great success.
There
will be much blood spilt over institutional changes,
especially if they require a treaty amendment that could
reopen an argument with Britain over the repatriation of
powers from Brussels. In any case, a re–engineered EU will
not impress the markets unless they think it will act more
effectively. Will the strong then be more likely to stand
behind the weak?
Closer bonding
Inexorably,
all this leads to talk of a deeper “transfer union” and of
issuing joint Eurobonds. Mrs Merkel says this is a matter for
future generations: Eurobonds would need both a new EU treaty
and a new German constitution. But she may be forced to
discuss it quite soon. Spain and Greece, and most Socialist
opposition parties, want Eurobonds. The commission will
propose them in the autumn. Critics say mutualised debt
encourages the profligate to freeride on the virtuous. Might
Eurobonds turn to junk bonds? And even if moral hazard can be
avoided, will Germany and others not end up paying higher
rates on their debt? Much depends on the course of the crisis:
if it rages on, more people may come to see Eurobonds as
cheaper than more bail–outs.
Euro–zone
leaders find themselves buffeted by a crisis they cannot
control. How much more fiscal and political integration does
the euro need? Nobody knows. Are citizens ready to give up
more sovereignty to save the euro? Nobody has asked them. The
more leaders try to fix the euro’s flaws the more they risk
exposing a flaw in the European Union itself: a project of
European integration that lacks a strong democratic mandate.
Europe's
Europe crisis
Implosion
of Europe may disturb August vacations
By
R.A.
The
Economist, August 3rd 2011
Washington.–
Charlemagne updates us on the situation in Europe, where the
latest Greece rescue did nothing to improve the outlook for
Spain and Italy:
"[T]he
spreads of Italy and Spain (right–hand chart), already
sickly, have continued to rise, reaching the highest level
since the adoption of the euro. Why is the cure not working?
One reason is that these two countries have not asked for, and
have not been given, the medicine of emergency loans, so they
are still struggling on their own. Another is that the
measures promised to contain the spread of the disease –
giving the euro area's main bail–out fund, the European
Financial Stability Facility (EFSF) greater powers to
intervene early in a crisis (see my earlier posting here) –
have yet to be approved by national parliaments, which are on
holiday. Finally, even if the EFSF's drugs are made available,
there are not enough supplies in stock to deal with an economy
as large and indebted as that of Italy. It may not even be
enough for Spain.
"The
lending power of the EFSF is being increased to its full
headline figure of €440 billion. But many think it needs to
be bigger still – five times larger, says one leading
financial analyst (see here). The bigger the crisis, it seems,
the bigger the dose of cash required. But the question is this:
as more countries fall ill and are unable to support the EFSF,
who will be left to bail out the euro zone? Already questions
are being asked about the creditworthiness of France, the AAA–rated
country with the highest debt ratio in the EU.”
I
have to say, it's difficult for me to comprehend the attitude
in the euro zone at present. Reuters is currently reporting
that European Commission President Jose Manuel Barroso is
acknowledging doubts as to the European Union's capacity to
solve the debt crisis. And yet we read things like this:
“With
many policymakers on holiday, there seemed little prospect of
early European policy action, although euro zone governments
were in telephone contact about the situation.
“German
Economics Minister Philipp Roesler said Italy and Spain were
not even discussed at Berlin's weekly cabinet meeting which he
chaired in place of Chancellor Angela Merkel, who is on
vacation and did not call in.
“A
German government spokesman said Berlin saw no reason for
alarm over the selloff of Italian stocks and bonds and was
focused on implementing the latest euro zone summit decisions.”
It's gobsmacking. Germans
are coming dangerously close to literally fiddling while Rome
burns. I mean, how does one react to this? Short everything
Italian, I suppose.
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