So, under huge pressure from Italy, Spain and France, German Chancellor Merkel capitulated. Spain and Italy got the right to ask for money from the European funding mechanisms, the EFSF and the upcoming ESM, to recapitalise their banks and support their government bonds without having to enter a dreaded Troika programme of austerity that has already been imposed on Greece, Portugal and Ireland.
Germany did not want to allow this, but Merkel eventually agreed because as Italian prime minister Mario Monti probably put it to Merkel in the small hours: if you don’t agree to provide funding now, Italian and Spanish bond rates will rocket; we won’t be able to fund our debt in financial markets; and at the next meeting, you will be talking again to Silvio Berlusconi and he’ll be saying that either Italy will leave the euro or Germany must!
Of course, what has been dragged out of Germany only provides debt and bank funding for the year ahead. The EFSF/ESM has about €700bn in the kitty and if the bank recapitalisation in Spain is to cost €100bn and sovereign debt support is to cost another €1trn, all these funds will soon be gone. The Euro leaders also agreed to set up a single European banking supervisor of all Eurozone banks by the end of the year. If that happens, then Germany could then agree to allow the ESM to have a banking licence. If that happens, it would mean that the ECB could lend the ESM money just like it does for any other bank, for up to three years. The door would be open to fund Italy and Spain infinitely and indefinitely, and not in dribs and drabs as under the Troika programmes. We shall see how that prospect goes down in the German parliament, the German constitutional court and the German electorate over the next few months.
But it is possible that ECB funding for the Eurozone’s government debt is on its way. This is not proper mutualisation of all Eurozone debt i.e. sharing out the burden of each country’s public debt among all states (as happens in federal USA, federal Canada or federal Australia). But, in effect, with the ECB taking on the burden, it would soon amount to the same thing – something Merkel told us would “not happen in her lifetime”.
And what does this mean for the small Eurozone capitalist states who were forced into vicious Troika programmes that have reinforced the collapse of their economies? The new pro-bailout Greek government is looking for a relaxation of its fiscal targets and cheaper terms for loans, and so will Portugal and Ireland. They will argue: why should just the big boys who would have brought about the break-up of the euro get easy money funding and not us?
The planned moves to ‘more Europe’, with tighter fiscal controls and eventual ‘fiscal union’ have been put off for discussion until later in the year. Instead, pressure and panic have forced Germany to relent and allow money to be transferred via the current emergency mechanisms and probably through the monetary tap being opened by the ECB. This means that Merkel still wants to save the euro and just hopes that the cost to Germany can be minimised.
This deal does nothing to restore economic growth, jobs and real incomes for the majority in Europe. The proposed ‘growth package’ of €120bn, or about 1% of EU GDP is a joke. Most of these funds were already in the EU budget, but just not used. The European Investment Bank will be able to raise more debt to fund infrastructure projects, but this is not going to happen overnight and will be subject to all kinds of typical banking conditions. In the meantime, Greece’s economy is contracting at a 9% rate, Spain’s at 4% and Italy’s at nearly 3%. Unemployment is now near 20%, with youth unemployment close to 50% in all three countries. The depression in Europe is intensifying.
All this deal does is to give more taxpayer’s money to failing banks in Spain and reduce somewhat the cost of servicing public sector debt. The ultimate question of whether the Eurozone can move towards a proper fiscal and monetary union or will break up under the pressure of debt and depression remains open.