We recently touched on the quartetengaged in drawing up a composite motion, in order to faire avancer le schmilblick (= to move the schmilblick forward, or in other words to make a limited contribution to solve a complex problem). Before describing their efforts it may be helpful to recall the definition (*) given to it by its creator, Pierre Dac.
Mario Draghi, Jean-Claude Juncker, Herman Van Rompuy and José Manuel Barroso (in no particular order) may not be aware of the schmilblick. Nonetheless, this has not stopped them from searching for it in the form of a bold compromise formula destined for the next summit, with the aim of exchanging debt pooling measures in return for the reinforcement of the budgetary union held so dear by the German Government. Because this is how the bidding is likely to pan out. But where is the happy medium? Sensibly, this question will be put back to the end of the year.
It was no longer possible to carry on. Two and a half hours of videoconference between the Eurozone’s finance ministers (joined by Christine Lagarde on behalf of the IMF) were needed to finalize the scheme, allowing the German and Spanish governments to save face. Germany made sure that aid for the Spanish banks passed via the State, thus increasing Spain’s deficit, whilst Spain attempted to explain that this was not a bail-out plan or a loss of sovereignty, with, furthermore, the assistance not being subject to any austerity measures.
Up to a hundred billion Euros are going to be lent to FROB, the government’s banking support fund, on the condition that the government takes measures to stabilize its banking system. How this will work is yet to be defined. The IMF, which is not contributing financially to the rescue, will be entrusted with the task of ensuring it all goes smoothly.
The case has been heard: Barack Obama and David Cameron demanded immediate action from the Euro zone leaders, frightened by the prospect of the Spanish and Greek crises occurring at the same time, and Angela Merkel responded by announcing that no miracles should be expected from the Summit at the end of June. She continues to insist on a gradual long-term evolution towards budgetary and political union (within the next 5 to 10 years according to Mario Draghi) and to dig her heels in with regard to any measures which would ease off on this preliminary restoration to order of public finances, according to the timetable and criteria which she has already had adopted.
Implementing this has become more and more like passing through the eye of a needle. A renegotiation of the terms of the Greek bail-out is inescapable (without forcing a Euro zone exit with all the unknowns that this would entail), as is the elaboration of the details of a plan for Spain. In both cases, the opposition parties or the government in place, are looking for new sources of economic synergies so they do not have to impose any new additional austerity measures. If we are to believe Antonis Samaras, the leader of the Greek New Democracy party, the answer is to be found through taking measures against fiscal fraud and waste. Let’s have a bet on it! In both cases, it will be necessary to stagger the debt reduction over time if the initial timetable is to be compatible with this new state of affairs, and there will be no greater guarantee of success. Negotiations are likely to be strained, and the atmosphere created is likely to spread the contagion to other countries in acute crisis.
Worried by the sight of the Europeans entrenched in their respective positions, Barack Obama reached for his telephone. The day after the G7 videoconference between the Finance ministers and the central bankers, of which nothing came, he successively called David Cameron, Angela Merkel and Mario Monti. With this latter, the strengthening of the discussions centered on the Euro zone and growth. With David Cameron, who is going to meet Angela Merkel in Berlin, it was about the need for an “immediate plan”. Of the conversation with Angela Merkel no details have emerged. All promised to keep in contact with Barack Obama over the coming days, before meeting up on the 18th and 19th June at the G20 in Mexico, a sign that there is still plenty of work to be done before an agreement is found between them.
Expecting nothing from the governments, tensions on the stock and bond markets eased off all the same, bearing witness to their hopes of a renewal of central bank interventions. A meeting of the Bank of England is due on Thursday, as well as the expected appearance of Ben Bernanke, the chairman of the Fed. While the ECB, which met today, is keeping its cards close to its chest in order to force European leaders to assume their responsibilities, the Bank of England may well reactivate its debt purchasing programme, which has only been temporarily suspended. Looking further ahead, the possibility of a reduction in the key ECB interest rate, and an eventual third wave of massive loans to banks, continue to raise hopes, though Mario Draghi clearly stated that they are not ready to take these steps at the current time. By opting to not renew his purchases of Spanish debt on the secondary market, he sent a clear signal that the ball is in the court of the governments.
The European Commission in Brussels is getting ready to unveil a project aiming to prevent and cure the banking crises, destined to enter into service in 2014, certain procedures being foreseen for 2018. There is a certain sense of timing, but certainly not a sense of urgency.
The Spanish are now appealing for help, admitting that they have been cut off from the markets, ready to sell off whole swathes of their banking system to save it, calling for direct aid so as not to fall into the clutches of the Troïka. At the end of the G7 finance ministers’ conference call only one important piece of news could be gleaned: the Europeans are committed to a ‘rapid response’ to the crisis, revealed the Japanese finance minister, Jun Azumi. All the other participants endeavoured to play down its importance, which indeed had led to nothing concrete in the short term.
The rest is in keeping. There will be plenty of time to analyze the Commission’s propositions in detail – as long as there are some. What has already come to light, however, is without ambiguity: the project carefully avoids tackling any of the difficult questions. It leaves great latitude to national regulators, in spite of them being suspected of all kinds of leniencies, and it clearly avoids tackling all the financial aspects. Its vagueness allows us a glimpse of the possibility that under cover of relieving states from the costs of banking bail-outs, it leaves the door ajar which will allow them to be asked to contribute in future.
“There is a first assessment, then a second, a third, a fourth…..It’s the worst possible way of doing things because everybody ends up doing the right thing but at the highest possible cost and price”. Who was it speaking so harshly yesterday of banking losses and of the policies of the European leaders? Answer: The ECB president, Mario Draghi, in the course of a hearing before the European parliament.
With his colleagues from the governing council, he drove home this same point, supporting the creation of the “European banking union” proposed by the Commission, starting with the constitution of a deposit guarantee fund. He was supported by the governor of the Bank of Italy, Ignazio Visco, who is getting ready to lead the charge. Rising Spanish bond rates have driven Italian rates higher; according to sources, the recession is estimated to be between -1.4% and -1.7% for this year, and the official unemployment rate exceeds 10%.
At one moment or another it becomes necessary to face up to reality, and this moment has arrived, manifesting itself in the massive outflows of capital from Spain, calculated by the Bank of Spain at 66.2 billion Euros (according to the latest available figures) for the month of March alone. The withdrawal of deposits is not a fantasy taking the form of long queues at cash machines (which could always occur): it is people with capital and businesses which are fleeing the country.
Added to the collapse of an entire swathe of the Spanish banking system, this phenomenon has suddenly come to dominate the public debt crisis and its corollary the fiscal discipline pact which had aimed to resolve it. Sidestepping the issue, Angela Merkel has declared that the Spanish situation is not the result of the strategy of austerity that she has advocated, but the outcome of the burst property bubble which occurred before its implementation. As if the former did not feed the latter.
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