Posts tagged ‘Eurozone’
It seems that a European Banking Union has become the magic solution to the eurozone debt crisis. This week’s meeting of eurozone finance ministers in Brussels confirmed that European funds will provide direct support to Spanish banks, to the tune of €100bn in loans from the European Financial Stability Facility and subsequently the European Stability Mechanism.
The aim of the scheme is “to break the vicious circle between banks and sovereigns”, which implies that eurozone governments will no longer be expected to shoulder the burden of bailing out their banks in times of trouble. The debt will not be part of Spain’s government deficit, as no guarantee will be required of Spain, but in return the government will bring in tougher austerity measures, in order to cut borrowing below 3 per cent of GDP by 2014, a one year extension to the current deadline.
The plan is bound to raise a further storm in Germany, where many commentators see it as transferring risk to German taxpayers which should be borne by the shareholders of the banks concerned and their governments. Another challenge for Mrs Merkel!
The first tranche of €30bn will be transferred by the end of July and held by the Spanish government as a contingency. Madrid is committed to wholesale reform of the Spanish banking sector as a whole and major institutions will be “stress-tested” to establish their viability.
Next stage will be the creation of a “single supervisory mechanism” for the banking sector which, once established, would oversee the reform and restructuring of banks. This should be in place by the end of the year, provided that Commission proposals, due in September, can be adopted in time.
Commissioner Michel Barnier has identified the questions this raises in his statement to the Economic and Monetary Affairs Committee of the European Parliament, and he still has a lot to answer. He asks whether the supervisor would replace national authorities or complement them; how the authority can “be open” to all member countries and respect the integrity of the single market; and whether it will oversee all banks, or just international institutions and banks in difficulty. Altogether a list of big questions, and of major significance for the City of London.
There is no doubt that the scandal over the alleged fixing of LIBOR and EURIBOR rates by 20 or more global banks will further strengthen the argument for tougher EU regulation just as Europe is planning for a banking union with common rules. Barnier has lost no time in pressing for legislation which would require false reporting of Libor rates to be made a criminal offence and introduce measures to ensure oversight of the reporting system.
For years the prospect of regulation was fiercely resisted across all financial services at both the national and the European level, and still some pockets of self regulation remain, including the fixing of LIBOR rates, which provide the benchmark for a vast range of financial transactions. How times have changed, when we see the deputy governor of the Bank of England, Paul Tucker, describe the whole scandal as a “cesspit” and tells MPs that “self-certified markets are open to abuse”. It’s not an easy time to be a banker.
European Council president Herman van Rompuy has arranged a summit dinner for EU leaders on May 23. For François Hollande the Brussels feast will be a first opportunity to brief all his colleagues on France’s new approach to the eurozone crisis and how he sees a return to growth in Europe. His message will be relatively well received.
The fascinating question is who will fill Greece’s dining chair and how deep will the Greek crisis have become in two weeks’ time.
Writing on Europe Day, May 9, the prospects are not encouraging. Suddenly the prospects of Greece quitting the euro look much more plausible. While neither PASOK nor the New Democracy party have been able to form a coalition, Alexis Tsipras, leader of the Left Coalition and leader of the second biggest party, demands that any coalition partner must join him in renouncing the bailout package and tearing up the fiscal treaty.
His argument is that Greece can retain the euro without the austerity, because any attempt to expel the country from the eurozone would bring the whole edifice tumbling down. In other words, you need us more than we need you, so you will have to concede.
New Democracy leader Samaras is reported as saying that “Mr. Tsipras asked me to put my signature to the destruction of Greece. I will not do this”. PASOK’s leader Venizelos, who negotiated the latest €130bn package, is equally clear. He wants a pro-Europe unity government.
The most likely prospect seems to be that Lucas Papademos will continue as caretaker prime minister until new elections can be held, possibly on June 17. The question is whether enough Greek voters, faced with the new reality, will revert so soon to traditional loyalties. If the answer is no, then it could be back to the drachma.
The Greek crisis has set François Hollande, by contrast, plumb in the mainstream of eurozone thinking. Commission president Barroso, Mario Monti in Italy, the ECB’s Mario Draghi and Christine Lagarde at the IMF have been quick to argue that Hollande’s priorities are their priorities. More spending by EU structural funds, emphasis on research and innovation, and a bigger role for the European Investment Bank are part of the mix, but deficit reduction remains a major preoccupation.
Until French parliamentary elections on June 10 and 17 Hollande will continue to focus on the growth agenda. He will push for a “growth pact” to be linked with the fiscal treaty but has told the Irish that there is no reason to delay Ireland’s May 31 referendum on the grounds that it might be changed. (Greece, Portugal and Slovenia have already ratified).
Michel Sapin, possible finance minister and a veteran of the Mitterand years, has already said that Eurobonds are not an answer to the crisis (which avoids one contentious issue with Germany), but a financial transaction tax will be high on the French agenda, although Hollande makes reference to the UK’s hostility to the idea in a wide-ranging interview. It’s worth noting, too, that he wishes to move away from the Franco-German “duopoly” in European policy, while retaining close links with Merkel.
There is indeed a widespread assumption that Hollande’s victory and the Greek results mark the end of Angela Merkel’s predominance in European politics. I doubt it. Germany clearly remains fundamental to any resolution of the eurozone crisis and remains the motor of Europe’s economy.
Just to rub home the facts: German exports were up nearly one per cent in March to an all time record of €91.8 billion and imports were up by 1.2 per cent to €78.1 billion – also a record. But on a more sobering note for the new French President French labour costs are now higher than those of Germany. Economic competitiveness will inevitably need to become part of his agenda.
This week’s summit in Brussels has certainly been a defining moment in the history of the European Union. The UK’s decision to block any revision to the existing EU treaties as part of the package to save the euro is confirmation that we live in a Europe à la carte. Whether it proves to be a “two-speed Europe” only time will tell. That depends on how the eurozone evolves.
Given Britain’s position outside the euro and the fiercely eurosceptic mood in his Conservative party I’m not sure that David Cameron had any choice other than to veto proposed modifications to the EU treaties.
Cameron’s approach is consistent with the coalition agreement with the Liberal Democrats. This clearly stated that a referendum would only be triggered if there was a transfer of power from the UK to Brussels. The prime minister does not want to be forced into a popular vote; the best way to avert any such risk is to use the veto and to leave the 17 to work out their own solution.
Suppose Cameron had agreed to support a treaty revision aux 27, it would have been extraordinarily difficult for him to avoid a referendum. Britain is already subject to Article 126 of the EU Treaty concerning excessive deficits and government debt. Any change to the associated protocol to include new rules would surely have raised major problems in the Westminster Parliament. An alternative would be the use of Article 136, which sets out provisions specific to eurozone countries, but that too would seem to implicate the UK, particularly as it would further strengthen the powers of the Commission and the Court of Justice.
Cameron has domestic political reasons to tread carefully. There are quite a few Tory MPs who loathe his partnership with the Liberal Democrats and who would gladly use the European issue to seek to depose him and break the coalition. He may have cited the defence of the City of London as his make-or-break issue, but this seems rather disingenuous, since financial services legislation is governed by the existing treaties, while the imposition of a financial transaction tax, seen as a special danger for UK financial services, would be subject to unanimity.
There is of course an implicit danger here, that the 17 eurozone countries could decide to impose a unilateral tax on their own investment firms, whether operating in London, New York or anywhere else. And pity poor old Ireland, which dreads a eurozone agreement to harmonise corporate taxes and so threaten Ireland’s 12.5 per cent rate.
It is in areas like these that Britain’s longer term negotiating position in Europe will be seriously weakened. It is significant that six non-euro countries are already committed to join the “fiscal compact” agreed in Brussels, while Hungary, Denmark and Sweden will probably do so after consulting their parliaments. The UK will be the odd one out.
One question which the summit does raise is whether the British prime minister has worked hard enough to build alliances with his natural allies in Europe. Briefing after last month’s meeting with Chancellor Merkel suggested that some sort of agreement had been reached between the two of them, but there was no evidence of mutual understanding in Brussels this week.
Former MEP Ben Patterson has just published The Conservative Party and Europe, a comprehensive book tracking how Conservative Party opinion has switched from staunchly pro-Europe in the 1970s to viscerally anti-EU today. This switch led to the decision of the Conservative group in the European Parliament to sever links with the European Peoples’ Party. Patterson argues that this move potentially weakened David Cameron’s position with his natural allies.
The recent EPP meeting in Marseilles was perhaps a case in point, where EPP leaders met informally to agree common positions or at least to clarify reasons for disagreement in advance of the summit.
It could be argued that Friday’s blood-letting has cleared the air. The UK can now concentrate on the overriding priority, to do everything it can – including through the IMF – to help prevent the collapse of the euro. The irony is that it is the weakness of the eurozone structure, and not its strength, which has triggered the need for the new inter-governmental treaty and threatened the future of the whole European project.
Since the eurozone crisis first erupted three years ago it has largely been seen as Europe’s problem. It has now become a global emergency.
This crisis is “scaring the world” says President Obama, whose Treasury Secretary Timothy Geithner visited Europe twice in a week to meet European finance ministers and who has demanded speedy action in the strongest language, warning of “cascading default, bank runs and catastrophic risk”. Such US criticism looks a bit rich in the wake of the great American budget row, but it seems that when Europe sneezes, the whole world may catch pneumonia.
The G-20 has been mobilised to put co-ordinated pressure on the Europeans, while the International Monetary Fund is becoming a central player in a desperate campaign to avert global recession. The question is whether the IMF has the firepower to meet the challenge. In the few short weeks leading up to the G-20 summit in Cannes on November 3-4 an action programme must be devised to instil new confidence into the global economy and restore faith in the markets. Six weeks to save the euro, says UK finance minister George Osborne. Six weeks to save the world economy, some say.
A whole raft of ideas is in the air. One is to gear up the €440 billion EFSF by borrowing against it, so creating a fund of €2 trillion; another is a 50 per cent haircut of Greek bonds, allowing default by any other name but keeping Greece in the eurozone, with new funds provided to the banks by the ECB to strengthen their balance sheets. These are all variations on the piecemeal measures already adopted, too little and too late, by Europe.
Angela Merkel stresses the need for a step-by-step approach – or perhaps day-by-day would be more appropriate. She doesn’t want to frighten the horses in advance of Thursday’s meeting of the Bundestag, which will vote on the European Financial Stability Facility, so she does not welcome talk of Greek default or the creation of eurobonds.
The markets must not be allowed to dictate policy, she says, and she reassured Greek prime minister Papandreou of Germany’s support on this week’s visit to Berlin. The crisis was a debt crisis, she said, not a euro crisis.
It does look as if the German Chancellor will win the vote on Thursday with opposition support, but whether she can take her coalition partners with her is another matter. There is particular concern among FDP members over the possible expansion of the stability fund.
Ratification of the fund has other hurdles to overcome, but the Slovenian parliament has now given its approval. There follows Wednesday’s vote in the Finnish parliament, which has been negotiating “collateral” with Greece as a condition of supporting the bail-out plan, and Slovakia, voting on October 11, which hates the idea of bailing out a wealthier neighbour, but is nonetheless likely to give its approval. Tuesday’s approval by the Greek parliament of a new property tax should underpin support in these countries.
Approval of the EFSF will no doubt help to soothe the markets in the short term, but it now seems clear that global support will be needed to restore long-term stability to global markets and head off recession. This will inevitably involve China, India and other developing economies, marking a further shift of economic power across the world.
People may have questioned Chancellor Angela Merkel’s commitment to the European Union over recent years, but there is no denying the pivotal role which she is playing in defence of the euro. What a desperate battle she has to fight! The trouble is that her own battalions are deeply sceptical of her campaign.
The misgivings in Germany over any bail-out of Greece, Portugal or Italy already run deep (Ireland is making tangible progress in tackling the crisis), but Friday’s resignation of German ECB board member Juergen Stark has given them greater force. Everyone is saying that his departure stems directly from his objection to the ECB purchase of bonds from the weaker economies in order to safeguard their banks.
Stark couldn’t possibly comment, but his decision has much the same flavour as the resignation of Axel Weber as president of the Bundesbank earlier this year and the subsequent appointment of Italy’s Mario Draghi as head of the ECB from November. What’s more, Stark is a member of Merkel’s own party, the CDU.
The German constitutional court gave Mrs Merkel some comfort early last week, when it pronounced as legal the measures which have so far been taken to support the euro.
More threatening was the Court’s insistence that further measures must be subject to a formal vote in the Bundestag. That could potentially scupper the introduction of yet further measures to support the weaker eurozone member states, in particular the expansion of the European Financial Stability Facility to €440 billion, of which €211 billion would be committed by Germany. It almost certainly rules out the idea of eurozone bonds, a widely canvassed option for resolving the crisis, but one which would imply even greater German burden-sharing.
The future of Germany’s coalition government is now at risk of collapse if Merkel’s own party has too many defections over support for the euro, maybe even in advance of the 2013 elections.
Merkel’s approach is to stress the need for long-term measures, and she is adamant that treaty changes are needed to make the stability and growth pact legally binding and defensible in the European Court of Justice – yet another reminder that it was Germany and France which drove coach and horses through the pact in 2003. The Chancellor blames that failure on the Socialists, as she does the decision to allow Greece to join the euro in 2001before the country was ready. There is no way to avoid modifications to the treaty, she says, if the euro is to survive.
Negotiating proposals for treaty change will be a major preoccupation for eurozone ministers in the coming months, but it will be a difficult process, coming to fruition in 2013 or later, which is hardly the short-term solution that the markets are seeking.
British euro-sceptics, especially Conservative members of parliament, see any treaty revision as the perfect opportunity to argue for a watering-down of the UK’s commitments to Europe. It would be sad irony if the creation of the euro, such a powerful force for integration, should evolve into a weapon of disintegration.
It was evident from the beginning of the eurozone crisis that the only way to discipline recalcitrant member states in the face of enormous budget deficits was to involve the International Monetary Fund, an independent, external organization which was definitely not part of the family, a body which could lay down tough conditions for winning its support, and could pull the rug out if necessary.
So it was little surprise to see the forthright tone of the IMF team when they left Luxembourg on June 7, having completed their analysis of the situation. Their report makes quite a contrast to the gentle reassurances of the eurozone ministers at their meeting on the same day.
The IMF report doesn’t mince its words. It may be familiar language for failing economies in Latin America, but for the eurozone! Take a few phrases: “Policies need to move urgently from crisis management to fundamental reforms”, “strengthen economic governance of EMU” “longstanding problem of anaemic growth in the euro area must now be addressed”, “the euro area fiscal framework needs to be substantially strengthened”, “more ambitious changes are needed”. And so on, with detail. The fundamental theme is that European countries must transform their economies, slash government spending and drive for economic growth.
The eurozone ministers did formally launch the €440bn European Financial Stability Facility at their June 7 meeting, but that’s definitely “crisis management”. The EFSF has been established as a limited company under Luxembourg law and will work in conjunction with the IMF to guarantee support for eurozone members if their credit position should weaken.
The question still remains as to what the eurozone can do to strengthen its effectiveness and meet at least some of those IMF demands. An intriguing game of smoke and mirrors has been played since the Special Purpose Vehicle and the associated IMF support were announced on May 9, a game designed to convince the markets that Europe is getting a grip of its profound economic crisis. The reality is that everyone has a different idea of what needs to be done and what can be done in the longer term.
Economic government for the eurozone. That’s the catch phrase. President Van Rompuy has used it, French Economy Minister Christine Lagarde has used it and Chancellor Angela Merkel has almost used it – “economic governance” is the closest she has come (also a phrase used by the IMF). President Sarkozy has spoken of a Eurozone Council. But a closer look at how it would work reveals something like a beefed-up version of what already exists.
The argument that a European single currency can only survive if there exists a common economic policy, common fiscal policy and common budget policy may prove to be correct in the long run, but it is clear that this is not what Europe’s present leaders mean when they talk of economic government.
France wants a formal decision-making structure where heads of state and government agree on fiscal discipline and maybe impose sanctions on recalcitrant member countries. Germany in effect argues for a stronger commitment to the stability and growth pact (and has announced budget cuts of €30bn over the next four years to do its part). Luxembourg Prime Minister Jean-Claude Juncker, president of the eurozone group of countries, believes that eurozone governments should vet each other’s budget plans. But nobody contemplates the transfer of fundamental tools of economic management to a supranational European policy-maker. Maybe the IMF is a different matter?
So what of the euro crisis? At least the decline of the euro is seen as a positive, making European goods more competitive and – perhaps – boosting domestic demand within the crucial German economy. What is also evident is an increased determination to cut government spending sooner rather than later, reflected in the G-20 meeting. And of course these are not challenges faced only by the eurozone; the UK’s new coalition government has a massive challenge ahead in reducing spending and boosting growth. A poisoned chalice indeed!