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Tuesday, May 11, 2010

They said it wouldn't happen

What was inconceivable only a couple of months ago has now happened: EU leaders have agreed a massive €500 billion bailout package for eurozone countries facing sovereign debt problems – on top of the €110 billion already committed in a separate rescue package for Greece. An additional €250 billion could also come from the IMF should things get really sticky.

You have to go back pretty far in history to find a time when Europe’s leaders have been so desperate. And you can see why. Markets remained unconvinced of the adequacy of the original rescue package for Greece, and you could sense some serious anxiety over the risk of an escalating sovereign debt crisis, involving Spain, Portugal, Ireland and Italy (The UK is not exactly immune either, although its situation is different). In the last week, the EU elite realised in horror that their flagship project might actually be on the verge of collapsing under the weight of its own contradictions.

Of course, these kinds of tensions are exactly what the sceptics always warned against, and those who blindly argued in favour the Single Currency have some serious soul-searching to do. But it’s still in everyone’s interest that the eurozone sorts out its mess, and the massive bailout package agreed over the weekend seems to have calmed the markets - for now.

As an event in the EU’s history, what happened over the weekend is absolutely extraordinary on so many different levels:

1) Until very recently, Eurozone bailouts were considered a no-go, since both the letter and the spirit of the EU Treaties simply don’t allow for them. Just consider that as late as March this year, Angela Merkel said, "We have a Treaty under which there is no possibility of paying to bailout States in difficulty”.

But as we noted many times before, EU law has a tendency to become irrelevant in times of crisis and the once heralded no bailout principle has now been watered down to the point of becoming meaningless. Having said that, the ‘big’ bailout fund still has some ways to go before it is approved by national parliaments and has passed all legal hurdles, as Edmund Conway points out on his Telegraph blog.

2) The scale of the bailout is mind-boggling. Again, consider that only a few weeks ago, the amount discussed was closer to €30 billion in a one-off bailout for Greece (and before that €20-25 billion). Then, on May 3rd, that amount had almost quadrupled. As Italian Foreign Minister Franco Frattini put it, “It was necessary to intervene right away to help Greece. To avoid damage we initially talked about 50 billion euros, but decided on 110 billion only 10 days later.” And roughly a week later the deal had been rolled out to all eurozone countries, now involving hundreds of billions of euros.

You can forgive people for wondering where this will end. Particularly given that throwing good money after bad in this kind of way isn’t really solving the fundamental problems of the weak solvency, competiveness and productivity that weaker eurozone countries are currently facing. So this deal could easily spiral out of control and see UK and European taxpayers becoming exposed to ever growing debt burdens of governments over which they have no democratic control whatsoever. This simply isn’t sustainable.

3) EU leaders are basing parts of the bailout on Article 122 of the EU Treaties. This is profoundly dishonest and involves a huge legal stretch. Article 122 states that,

"Where a member state is in difficulties or is seriously threatened with difficulties caused by natural disasters or exceptional occurrences beyond its control, the Council, on a proposal from the Commission, may grant, under certain conditions, Union financial assistance to the member state."

As we’ve stated before, the European Council has previously said that any use of this article must be compatible with the no bailout rule in the EU Treaties. This interpretation is now being completely ignored.

Telegraph journalist Bruno Waterfield summarises the issue well on his EUobserver blog,

“'Exceptional occurrences beyond control’? This is a lie. A whopping, howling lie told to us by Europe’s political class. This crisis is a product of human agency, the choices and decisions taken by people facing circumstances that are man-made and, thus, susceptible to political intervention. To use a legal clause designed for earthquakes or potentially extreme unforeseen circumstances that threaten the existence of one member state to save the skins of the EU’s political class is profoundly deceitful – quite aside from being legally dodgy."

4) What we were told would never happen, has now occurred - British taxpayers have become directly liable for the debts of eurozone governments. Part of the rescue package involves extending a special fund, previously available only for non-eurozone members Latvia and Hungary. This so-called 'stability fund' will allow the EU Commission to borrow up to €60 billion on international markets, in addition to the €50 billion that was already in the pot, using the EU budget as collateral. If a receiving country fails to pay back the loan, all 27 EU member states would be forced to pay into the EU budget to cover the default, meaning that British taxpayers would be liable for about 13 percent of any losses (corresponding to the UK’s share of the EU budget). Alistair Darling maintains that the maximum loss to British taxpayers would “only” be €8 billion.

Mr Darling said yesterday that the UK will never “underwrite” the euro, but that is exactly what is happening (although the UK will be left out of the bulk of the rescue package, the €440 billion scheme of bilateral eurozone loans).

5) Eurozone leaders took a decision involving non-eurozone countries but without the latter being represented. Alistair Darling has said he supports the UK’s inclusion in the stability fund, but in reality he doesn’t have much of a choice. The decision was effectively taken at the eurozone summit on Friday and since the deal was decided using QMV (as it was based on Article 122), the UK didn’t have a veto when the deal was sealed in the Council of Ministers on Sunday. This is another thing that never was supposed to happen. The fact that the UK only has a caretaker government in place at the moment didn’t exactly help either.

6) Germany had to cave in to French demands on the scope and details of the bailout. According to FAZ, following the deal, Nicolas Sarkozy triumphantly said that "95 percent" of the agreed bailout package "reflect French proposals…at last we have decided to give the eurozone a real economic government." This whole arrangement has Sarkozy’s fingerprints all over it. Or as the Brussels correspondent for FAZ, Werner Mussler noted yesterday, "The facts are: Sarkozy has achieved what he always wanted: the fundamental decisions of the eurozone will be taken by the leaders of the euro states."

7) The line between fiscal and monetary policy has been blurred. Arguably the most significant move over the weekend was the ECB’s decision to buy eurozone government and private debt. In doing so the ECB clearly bowed to political pressure, compromising its independence while for the first time getting involved in fiscal policy – akin to ‘quantitative easing’ in the UK (The EU Treaties prevent the ECB from buying bonds directly from governments, so to circumvent the rules it will instead be buying debt second-hand from banks). This is huge. In combination with the other moves towards fiscal EU centralisation (including more EU budgetary controls), it’s now beyond doubt that we’re seeing the emergence of an economic government for the eurozone.

Will the Germans accept this brave new eurozone? That’s far from clear. Die Welt set out its position in a comment piece yesterday:

“This [the involvement of the ECB] will harm the stability of the euro in the longterm and bury the German belief in the stability of the euro. The costs of this error are not yet foreseeable...The German conceptions of stability principles, responsibility and a monetary policy independent of political influence are coming increasingly under pressure. The idea of an economic government with right of intervention in national economic policy, transfers of debt and a politically influenced central bank is on its way."

So EU leaders have given themselves some breathing space, but what have they actually solved? And at what cost, in the medium and long term, to the EU economy and to European democracy?

As the FT argued today:

“There can be no more pretence that monetary union respects the premise on which it was sold to European citizens, Germans in particular. There is a real chance that a euro member’s failure to pay its debts will land neighbours or the ECB with losses that can only amount to fiscal transfers or money-printing. Strict surveillance and ECB independence was meant to make it impossible to end up in this situation; both have been undermined...Pooling more sovereignty than it ever planned, the eurozone is now at the mercy of its most indebted members’ sovereign decisions.”


One Man said...

EU desperately needs to be refounded

17041937 said...

The EU and the ECB are in danger of going bankrupt too .

cornelius said...

The UK is being dragged into the Euro mess by dint of membership of the IMF.
Germany and France are also members of the IMF so will they be hrequired to contribute their IMF share as well as the ammount they will contribute as a members of the Euro?

Anonymous said...

The EU doesn't work and never will, for one simple reason. There is no such thing as a European, unlike an American. There is only self interest. Britains are the mugs of Europe because they continue to belive this "We are all in it together" myth. Why are the two richest countries in Europe (Norway and Switzerland) not in the EU and why are they prospering so well!