BACK FROM LOS CABOS, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

Given that the G20 has confined itself to mere generalities and that the European Summit on the 28th and 29th June is dangerously close, what can be expected of the meeting in Rome on the 22nd June between Angela Merkel, Mario Monti, Mariano Rajoy and François Hollande, intended to serve as preparation for it?

Two projects are being examined in parallel by the European institutions, which are being assembled together and presented as if they were one of Great Wonders of the World. Firstly, by issuing Eurobonds with a short maturity- and thus with limited risk – and secondly by the creation of a fund intended to bring together and finance over a period of 20 to 25 years the stock of debt which exceeds the threshold of 60% each country’s GDP – these countries will have to demonstrate their credentials beforehand with regard to their budgetary commitments. Thanks to these virtuous arrangements, we will all be saved and the chaotic debt-reduction strategy will finally work as it should!

Intended to ease the pressure on the debt-reduction strategy, this wonderful arrangement will not, however, get Europe out of the recession which is the main cause of the investors’ lack of confidence. Due to its global dimension, this prospect was at the heart of the discussions at the G20. In order to help private sector debt-reduction, these two complementary measures will be coupled with a ‘Banking Union’ based on the doubtful premise that the banks will be able to finance their own rescue-packages without any external intervention.

But the main flaw to this plan is nothing less than the fact that it is destined to sink without trace. Having had their fingers burnt through experience, the German Government wants conditions attached from now on, to any kind of debt pooling, conditions which – as it acknowledges itself – cannot be put in place in the short term. This is in spite of the fact that the quartet formed by Mario Draghi, Herman Van Rompuy, José Manuel Barroso and Jean-Claude Juncker, are still actively working on a project to unite all the fiscal, banking and political unions, in order to try to overcome this obstacle. It remains a minefield with just too many mines to clear.

Without delay, the moment they get back from Los Cabos, the European leaders will be getting ready to test out the fire-wall they have equipped themselves with: the EFSF and the ESM, in addition to the IMF (the third line of defence, which has just been reinforced). The invoice presented by the Spanish Government for the banking bail-out, on top of the inevitable need to finance its own sovereign debt as well – without which Italy will be in even more danger – are going to seriously test the financial capacities of the EFSF and the ESM. So much so that they will no longer be sufficient when Italy’s turn comes to need support, while an IMF intervention cannot be assured, given the reservations already expressed by emerging countries.

All this without mentioning that the Europeans are contributing a third of the 453 billion dollars pledged to the IMF, a commitment which has just been registered during the course of the G20. This is the equivalent – if it proves necessary to make use of these funds – of making them participate in their own bail-out! These financial montages are positively indecent!

How many weeks are likely to prove necessary for the re-negotiation of the Greek bail-out plan, and another fully-fledged bail-out plan for Spain? How are the Greeks and Spanish going to react? How are the markets, which are already clearly showing their impatience, going to put up with this kind of long drawn-out indecision?

By refusing to enter into the logic of a bail-out plan, Mariano Rajoy is in the process of becoming the unlikely hero of all those who reject a strategy whose logic is best expressed as suffering the tough consequences. He may soon be in competition with Antónis Samarás, who isn’t acknowledged as much of a progressive either. Where are we heading, I ask you?