STEPS TOO STEEP TO CLIMB, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

François Hollande is on the offensive and Angela Merkel firmly on the defensive, with both setting their sights on a compromise in the summit at the end of June (a compromise which remains inconceivable for the moment). How is it viewed by Paris, with Berlin continuing to stall, proposing a political union first and, pending this, the use of the existing mechanisms already in place – based on an analysis which sees the origin of the crisis as excessive public debt and a lack of competitiveness?

The main measure which is planned is based on the European Stability Mechanism (ESM) and on its capacity to bail-out the banks directly without passing via the states. This has the double objective of not increasing state debt, and of separating this state debt from that of the banks. At the same time, the ECB will be entrusted with supervising it, not only to make it more transparent, but also to give it greater independence from the political leadership of the states. A measure already supported by Angela Merkel. But the complementary idea is the adoption of a banking union which will be restricted to systemic establishments alone, in order to win the agreement of the German government. If all this is related back to the Spanish situation it becomes rather surprising.

A banking license will also be granted to the ESM, which will give it access to the ECB’s liquidity and further contribute to the decoupling already referred to, the states no longer needing to be directly solicited in order to guarantee financing on the market. But while a direct bail-out of the banks may only require a simple decision from the ESM administrators (the representatives of the Eurozone states), it is also the case that for the ESM to be able to access the ECB a revision of the existing treaties will be required.

What trade-offs can be proposed to the German coalition? Nothing more than the adoption of the Fiscal Discipline Pact, whose ratification is already on track, with some additional measures; a tax on financial transactions – which risks boiling down to a mere exercise in communication – once the final decisions are taken on its basis and rate; plus, most importantly, the issue of Eurobonds financing debt exceeding 60% of the GDP of each country, so as to spread out the repayments over twenty years. That is taking up once more the recommendations made by the commission of German wise men

Coming up against the stumbling block of how it can be financed, the great plan for a growth-fuelled recovery will have been whittled down to its simplest form once the 10 billion Euro capital increase by the European Investment Bank (EIB) is adopted. This is a ridiculous sum when compared with those mobilized elsewhere. This last component is thus very much the poor relative of the project, only sustained by those structural reforms whose aim is to reduce labour costs and restrict scope for public social intervention.

The evil spirits, of whom there are many, will assert that if the plan ever saw the light of day, it would help the banks out of a very tight spot, since, on their own, they are unable to extricate themselves from the situation. Using the pretext of not asking for any contributions from taxpayers, in spite of the fact that the yield on the banking tax foreseen will be far from sufficient, it will lead to contributions from the ECB, whose shareholders are the states (via the national central banks of the European Union). Moreover, it is in this area where there will be negotiations with the British, as they look to protect the City from any restrictive European regulations and ask for concessions.

As regards the public debt-reduction strategy, it will be staggered over time, which is a simple recognition of the fact that this is going to have to happen anyway. If, by using the development of the crisis as a lever, a plan ‘A’ finally were to see the light of day, it would be nothing more than a modification of the initial strategy which has now become impracticable.

The French and German socialists are at the heart of this evolution that they are attempting to push, supported by the right-wing Spanish and Italian governments who have everything to gain from it (though they advocate some variations). But the adoption of a compromise at the end of June summit is far from certain. With the French plan adopted, the margin for manoeuvre remains very limited, with no means of overcoming the European recession which still constitutes the principal obstacle. At the very most a bit more time can be gained, something which the German plan can no longer achieve.

Such a result would not have much impact on the current state of affairs, as the respite would be brief. According to statistics from the Bank of Spain, its banks are indebted to the ECB to the tune of 287.8 billion Euros. Moody’s has just downgraded Spanish long-term debt by three notches, now only one notch above junk status. On Thursday morning the ten-year rate for sovereign debt was hovering around the 6.9% mark. Merely continuing the current programme for Spanish debt refinancing is no longer possible; a rescue plan cannot be avoided. With the Spanish banks already seeking help, the existing European structures are not going to be able to cope, which implies an intervention by the IMF. If, as is probable, the markets continue to push up Italian bond rates, an overall reconfiguration of the European rescue will be indispensable to avoid the explosion of the Eurozone.

In Greece the Tavli pieces are already on the table and the game has commenced….

(*) Tavla, Tawla, Backgammon, Jacquet…