Guest post. Translated from the French by Tim Gupwell
What was the plan being drawn up last week in Rome which Merkel refused to sign up to? The other three participants, Mario Monti, Mariano Rajoy and François Hollande advocated using the EFSF, and in the near future the ESM, directly, to bail-out the banks without adding further to the public deficit (thus breaking the link between these two types of debt), as well as using them to purchase sovereign bonds in order to ease market tensions. Spain and Italy would be the principal beneficiaries of these measures.
But there is a ‘catch’ to these dispositions, which are supposed to rapidly resolve the stark problems. The combined means which the two funds would dispose of would be quickly used up, meaning either that they would need to be boosted by appealing to the states which finance them, or that a banking license would need to be granted to the ESM to enable it to access the ECB’s liquidity… The two taboos that the Bundesbank refuse to break are a pooling of debt which has not been thought through and which is at Germany’s expense, and an ECB intervention to relieve the rolling over of public debt.
According to the logic which the European leaders are committed to, there are in fact only two ways of financing an extended debt reduction timescale: the first is by borrowing on the markets, the second is by appealing to the better nature of the ECB. Failing that, it is a question of preparing for fresh debt restructurings, following the Greek model.
Last Friday in Luxembourg, a discussion between Eurozone Finance Ministers came to nothing, once again! They were discussing whether the bail-out of the Spanish banks (which will be implemented via the State) would, or would not, have senior debt status, in other words, whether it would be better protected than the securities held by private creditors. There is no better way of underlining, by way of the attention accorded to this question, the extent to which a future Spanish debt restructuring is on everybody’s minds, even if not on their lips. The argument of those who opposed it was that it would frighten investors and cause further panic….as if the harm hadn’t already been done, and the markets weren’t already convinced that this is going to happen anyway sooner or later….The Institute of International Finance has already created an ad hoc working party, with representatives from the ECB and the Treasury departments of national administrations.
Everyone from the IMF to the ECB, not to mention the majority of European leaders, have formed a common front to pressurize the German government, so as to avoid reaching that point. The European leaders, having failed to convince the Germans, and wishing to make a good impression, fell back on a growth plan representing 1% of the European GDP, but it convinced no-one. Next Wednesday, Angela Merkel will be in Paris to meet François Hollande, for a ‘working supper’, a final attempt to save the European summit on the 28th and 29th June.
Opportunely, an interview with an unidentified senior official from the German Ministry of Finances will appear on Monday in Der Spiegel, which describes in the harshest possible terms the consequences of a Eurozone collapse for Germany. According to him, the German economy could contract by 10%, and unemployment among the active population would increase from 2.8 million to 5 Million. To all intents and purposes the message being communicated is that “in comparison with this kind of scenario, a bail-out, regardless of how much it costs, seems the better option”.
In order to avoid this, the German government does indeed have a solution to put on the table. However, it has the major flaw of being for later on, just like the return to growth which it says will result from carrying out ‘structural reforms’. The proposed solution is a commitment to a reinforced political union, which would involve giving up further sovereignty, whilst integrating it into the broader framework of the moribund debt-reduction strategy which they champion.
In an attempt to overcome the opposition Wolfgang Schäuble declared in Der Spiegel that, “up till now, European member states have almost always had the last say. This cannot go on.” The German Finance Minister is presented by the newspaper as being in favour of transforming the European Commission into a genuine government, strengthening the Parliament, and electing the President of the European Union by universal suffrage. He concluded by declaring that “it would be absurd for the EU to break up. At a time when the whole world is coming closer together, why would the countries of Europe choose to go their own separate ways? That can, must and will not happen!”
In the absence of concrete measures, the political leaders are preparing to follow the path of least resistance: in other words, a confirmation of broad principles that won’t be too expensive. It won’t get them far in the current conjuncture.