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Monday, August 20, 2012

Showdowns that will define Europe's future

In today's Telegraph, we argue:
'It will not be the case that the south will get the so-called wealthy states to pay. Because then Europe would fall apart.” Thus spoke Horst Köhler, former German president, finance secretary and IMF head, almost two decades ago. 
Köhler’s remarks are worth pondering. A series of multi-billion-euro bail-outs – and more to come – have now planted a north-south political divide at the heart of the European project. Taxpayers in Europe’s north resent underwriting their southern neighbours, while voters in the south are equally frustrated at having austerity imposed upon them from abroad. As has been noted repeatedly, this is the greatest tragedy of this crisis: a project that was meant to bring people together, now risks driving them further apart. Alas, events in the eurozone this autumn could further exacerbate this tension. There are at least five key stand-offs to watch over the next few months:
Greece v Germany: Greece managed narrowly to escape running out of money today by raising almost 4 billion euros in short-term debt. But Athens will face an excruciating autumn. On almost every count, Greece is miles away from meeting its EU-mandated austerity targets, which raises the questionof whether Germany – or the IMF – will pull the plug on the country in October when its next progress report is due.
Though there is still scope for muddling through, almost any outcome will lead to rising political tensions. If Germany sticks to its guns, the popular disillusion in Greece will grow massively. If Berlin gives in, it faces a serious backlash from the country’s public – a majority of which wants to kick Greece out.
Spain v the North: Amid continued problems, Spain could possibly request EU cash as early as September. But the country is simply too big for a Greece-style bail-out, while Madrid would not accept having its economic policies fully decided in Brussels and Berlin. Instead a third way must be found involving less money and softer conditions, probably with heavy and controversial ECB involvement. The North will dislike such an arrangement – particularly cheap ECB money going to Spain – but may give in for fear of worse.
The bail-out funds v national democracy: On September 12, Germany’s constitutional court will rule on whether the eurozone’s permanent bail-out fund – the European Stability Mechanism (ESM) – is compatible with the country’s “basic law’, following a host of complaints. Though unlikely, should it strike it down, the markets will go absolutely crazy. Regardless, the ruling will leave a bad taste in Germany and shows how the ESM is becoming an increasingly toxic issue, with southern and northern politicians disagreeing fundamentally on its size and whether it should be given a direct credit line to the ECB.
The Dutch v Europe: September 12 will also see another example of national democracy reasserting itself: the Dutch elections. Geert Wilders, leader of the super-populist PVV, is seeking to turn the campaign into a referendum on Europe, hoping to tap into the Dutch anti-bail-out mood. At the same time, the Dutch socialists – currently leading in the polls – have vowed to resist both the EU fiscal treaty and further transfers of power to the EU without approval in referendums. A divided Dutch parliament and more assertive government will almost certainly make eurozone politics even more complicated.
Germany v France: This autumn will also see negotiations over whether the eurozone will take the next big leap towards an economic union, with an October EU summit tasked with providing a “road map” for more integration. Ideas include a banking union (with a single supervisor and joint backstop) and collective government borrowing in the form of eurobonds. The issues are tremendously complicated, subject to a cobweb of disagreements and will take years to clear away. But importantly, this could widen the gap between Germany and France, with the two disagreeing fundamentally on the order of events. Berlin wants a political union first, meaning greater German control over others’ finances in return for underwriting them – while Paris wants to press ahead with stronger bail-out mechanisms, via the ECB and others, leaving the oversight for later. The Franco-German axis is not about to break, but maintaining it will become increasingly difficult.
So how should Britain respond to all of this? Simple: try to control what it can control and leave the rest behind. The UK is right to seek to buffer up against a potential euro meltdown. It is also right to look for ways to ensure that further eurozone integration – such as a banking union – is not detrimental to Britain or the single market. But the UK government needs to stop giving unwelcome advice on the need to turn the eurozone into a “debt union” or for the ECB to start spraying the Continent with cheap money – both options effectively involving Angela Merkel completely running over her own voters.
The eurozone crisis has unleashed some seriously unpredictable political forces. EU leaders may have to choose between maintaining the euro and maintaining national democracy as we know it. In either case, we have no idea how voters – in the North and South alike – will respond.


Rollo said...

This is nonsense. The show-downs will only define Europe's past. It has no future.

Rik said...


This is likely a 50/50 (or something near in any of the 2 possible directions).
CSU and FDP have digged themselves deep in, it seems highly unlikely that with some other 'goodies' (aka further rescue stuff) to come they will let it go without getting something in return.
Seen from that angle Greece is a 'goner', as of the big things that are lilkley to follow Greece is by far the most expendable.

Seen from another angle. It looks like Merkel has given up on a real political solution because she is clearly testing the water how ECB involved will work out.
The ECB is simply not able to stabilise things for a longer period as the decision EZ staying together is medium and longer term simply in the hand of the voters in the main players. Germany as undisputed no 1, but also Holland as the de facto second biggest guarantor, France of course, but also TBTS Spain and Italy.
Unlikely all will remain with Europhile governments for the next decade or so.
Anyway without Spain and Italy going for some real structural reforms even with full ECB involvement a rescue is highly unlikely.

To keep Spain and Italy under control as far as that is possible anyway, Merkel simply most likely needs an example. Greece is also from that angle a very likely candidate. Simply by far the least collateral damage. Un(-EZ)linked economy, stand alone bankingsector, and most garbage at high costs already cleaned up.

Merkel is however clearly not on top of the situation and simply lacks a vision how the EZ can be a viable organisation in the future. Basically it is only German style austerity and kicking the can. As such not bad (but as stand alone unlikley sucessful

Anyway this could like last time (before rescue 2.0) give rise to some unexpected turns in this process.

Rik said...

Considering the Constitutional Court.
1. Unlikely to bring the E-court stuff in to delay this.
2. Likely to give an, allthough formally not a final ruling, de facto final one.
3. However. The Courts position has been made clear in eg earlier cases. Which gives it little room to manoeuvre. Highly unlikely that the Court will make a '180 degrees'.
Also not likely that it will take the decision to pull the plug out of Europe.
Also very likely that they see that this will not be the last case.
Therefor what is my best guess we will see a 'positive' ruling allowing it to be signed. But with all sorts of strings attached.
Clarification required on some points before it can be signed. Plus a lot of stuff for the future.
Which will make further rescuing at best very difficult.
More like further rescue will mean having t change the constitution by way of an referendum.

Rik said...

The next big thing is likely the conditionality of the transfer of Buba powers to the ECB.
If I understand it correctly it is done a) conditional and b) providing the ECB has as main task price-stability.

By starting the printingpress as proposed by some it looks like this condition will not be met.
This is more dangerous than the current discussions as it basically says yes or no and not has really the possibility to add conditions under which it is allowed.
No, being reverse the transfer and effectively kill the ECB and therewith the Euro.

Processstrategy most likely best to bring this up short before the 12/9. It gives that way a chance to stop rescue attempts and if not maximises the possibility to defer it.

Rik said...

Another point to watch. It looks like that Merkel has given up the possibility of saving the EZ in the appropriate way (the political one). By allowing ECB involvement, or better testing the water in Germany for it.

It looks like testing the water as she only says things when absolutely demanded (and that is her usual style of operating). Plus in a way she can move into all directions. Like the 'conditionality' in Canada. Is this the conditionality or the buying she agrees with or both?
What conditions, is it that politics should have the first and final say or are it mainly conditions for a rescue?
Probably Merkel herself doesnot know it yet, so how could we. But a thing to watch.

Anyway it is a bit weird seeing maekets so positive about this all. No political rescue possibilities means in my world no possibilities. The ECB cannot keep buying massively PIIGS bonds when not backed by politics and politics can not keep allowing it when voters donot agree on that. This is a decade long process with a lot of elctions and possibly referenda in that time.

Anonymous said...

The summary of events is most valuable but as, I keep noting, Open Europe does not draw the obvious conclusions!

"Simple: try to control what it can control and leave the rest behind." The plain fact is that Lisbon has left the Single Market decisions at the mercy of QMV and therefore in many substantive matters we are powerless.

Obviously any Union of any kind will require new treaties and at that point opposition will inevitably mean withdrawal. It as well to recognise that straight away! Recently OE reported vital surrenders on details of regulation said by Bloomberg to be "favoured by Britain."

Matters will come to a head this autumn and our coalition government must only move in these dynamic circumstances with the consent of the people and all efforts must therefore be bent to achieving a meaningful referendum. [A definition in this context of the word "meaningful" would be a task in itself!]

christina Speight said...

"Anonymous" at 1.44 was not that at all. I signed in as usual as 'Christina Speight'!

christina Speight said...

Moderator please- Can nothing be done to curb the verbosity of Rik. His postings are like thinking aloud as if he were using the blog to gather his own thoughts. Could he not gather those thoughts first and before posting them? When he produces multiple postings like this nobody else has a chance of being noticed or read. He is destroying any point in commenting here at all.

Denis Cooper said...

The ESM is vile, and it's a disgrace that the UK government is facilitating its imposition on the peoples of other EU member states.

If the British people were asked in a referendum whether the UK government should ratify the enabling EU treaty change, then there'd be an excellent chance that they'd agree that the ESM is vile and vote to stop it - which is a very good reason why on October 13th 2011 Hague made first use of his "referendun lock" law to prevent us having a referendum.

An e-petition calling for a referendum on that radical EU treaty change quietly agreed by EU leaders, including Cameron, on March 25th 2011, is here:


FreedomLover said...

1. Whatever EU leaders decide "between maintaining the euro and maintaining national democracy as we know it", surely Open Europe should be favouring democracy.

2. One of the "seriously unpredictable political forces" that the eurozone crisis has unleashed is Greek-style default. This is now catching on elsewhere. The small, English-speaking, Central American country of Belize has just called on its creditors to accept a 45% writedown of its debt - or allow it a 15 years' interest-free repayment moratorium. Who said debtors have no cards to play? Maybe this practice will soon spread further - not just southern Europe & Central America, but worldwide! See: http://www.zerohedge.com/news/aftermath-greek-blue-light-precedent-belize-demands-half-its-debt-or-else