TIME WILL TELL… AND MAYBE IT ALREADY HAS , by François Leclerc

Guest post. Translated from the French by Tim Gupwell

In the hope of solving the problems once and for all, Mariano Rajoy has decided to take drastic measures in Spain. Taken as a whole, he asserts that the measures that he is going to have adopted by the Cortes (the Spanish Parliament) represent some 65 billion Euros of savings or additional revenues over a period of two and a half years, the remaining time granted to him by the European authorities to meet the new public deficit reduction schedule.

By committing himself to a path which El Pais has compared to the ill-fated plan of Generalissimo Franco in 1959, the Spanish prime Minister is pursuing to the bitter end a logic which will not yield the desired result. The primary consequence is an increase in capital outflows as measured by the Swiss bank UBS – the nationals following in the footsteps of the foreigners who started the process last March – the effect of which will be to further undermine the Spanish banks whose rescue has just been decided on. An increasingly devastated Spanish society will continue to teeter on the brink – the key measures of the new plan consisting of a 3 point increase to the standard rate of VAT and a reduction in benefits for those in unemployment from more than six months….. Presented as a plan designed to prevent a collapse, it actually makes it all the more likely.

Has the debt reduction strategy not reached the end of the road? One would have to think so, judging from the impasse in the negotiations between the Greek Government, as well as Mario Monti’s presentation of the situation. The three parties in the Greek coalition have got together at the request of PASOK, unhappy with the performance of the Finance Minister Yannis Strournaras in the Eurogroup meeting, whose imperative mandate to renegotiate the memorandum has been re-affirmed. For how long can these arrangements hold up, if there is no easing up in the intransigence of the European authorities? Over the course of one year, from April to April, unemployment has risen by almost 40% in Greece, affecting 22% of the active population, 50% of the young aged 15 – 24 not in higher-education, nearly a third of those aged 25 – 34 and more than a quarter of all women.

Speaking at the annual assembly of the Italian Bankers Association, Mario Monti declared “we are in a war, a very tough war”, referring to the one he is leading against the injustices to which Italy is subjected, and preferring to ignore the sentiment widely held by investors that the country is unable to manage its colossal debt burden. As for Ignazio Visco, the Governor of the Bank of Italy, he once again renewed his calls for a fresh intervention by the ECB in the secondary markets in order to ease the pressure on Italian bond rates.

In Portugal, there is increasing discussion about the need to renegotiate the timescale of the bail-out plan, drawing on the Spanish precedent. In Ireland, the results of the 1st Quarter render it unlikely that the Government will attain its end of year objectives, while the EU authorities are looking into the possibility of a backdated direct transfer of the aid accorded to the banks via the state in order to help out this latter’s financial situation. But the Spanish example, which saw this principle confirmed before its application was ultimately put back to an undetermined date, does not give much grounds for optimism.

In the hope of being able to contribute to a reorientation of German intransigence which continues to ruin, in spite of premature hopes, the perspective of a plan A of debt-reduction, François Hollande is seeking to have the ‘balanced budget rule’ adopted. He seems to favour the solution of a simple organic law which would only require a simple majority (as opposed to a modification of the constitution) and would offer the advantage of not having to count on the vote of the opposition, particularly if some defections were registered amongst the socialist deputies. Only time will tell, as it is customary to say when a decision has to be taken to force the hand of destiny. In the circumstances, taking this decision when the facts seem to be forcing an increasingly inevitable change of direction, will not allow him to hide between the excuse of having had no choice. The other expression which springs to mind is that of being the architect of one’s own defeat.