Euro summit: not as long as I live?

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.

9 thoughts on “Euro summit: not as long as I live?

  1. Have you got a source for the Merkel quote? I’ve been looking for it but can’t find exactly what I’m after for a piece I’m planning.

  2. Reblogged this on Representing the Mambo and commented:
    Another very interesting piece (the web is full of them today so I don’t need to bother writing much!)
    I think what this piece reminds us is a theme I have been banging on about it for some time. The German government’s solution to this crisis is not based on economics as such, but is political. It has been exposed as just that in the last 24 hours or so. Under pressure from the more economically significant Spanish and Italians it looks like we now have an agreement to do things that Merkel promised wouldn’t, and more importantly couldn’t happen. Concessions (whether or not they will actually change the end result) are being made that were previously dismissed as unthinkable. An interesting observation one could make about the Eurozone crisis is that there have been quite a number of instances of things being impossible until they become inevitable. Funny that, don’t you think.
    As this piece from one of the most interesting economic commentators on the web points out however, these concessions and commitments will only provide temporary respite. The fundamental questions remain unanswered.

  3. What makes anyone think that Merkel backtracked, suffered a defeat, reversed course, compromised etc…?

    Was Germany’s commitments, liabilities for funding increased? No.
    ESM/EFSF can rescue banks directly? No, not exactly as the organizational document for the ESM says all funds go through governments. Maybe you think that won’t hold, but Merkel is betting that it does.

    Italy, Spain escape supervision of the “troika”? Oh, come on…

    1. Sartesian.

      Merkel certainly blinked in those small hours. Now the Germans are trying to convince their people that no concessions were made but, when push came to shove, Merkel blinked — perhaps for reasons of short-term expediency, but blink she did. Rather than be faced with Italy having to have a bailout or face dealing with Berlusconi by September she opted for some concessions to buy time.

      Of course, the Summit statement had sufficient ambiguity — especially in terms of its timing — to give all the players a fig leaf of sorts. Merkel could correctly tell her parliament she had delivered the growth package that the opposition SPD demanded as condition for its support of the Fiscal Compact and that no ESM funds would be injected into weak peripheral banks until a sober banking supervisory mechanism has been established (December 2012 at the earliest). The Club Med boys could go home saying they’d won looser conditionality for future support (no Troika programmes), the possibility of direct bank recaps and removal of EFSF senior creditor status. This simply buys time.

      But the ESM remains seriously light on financial resources. If Spain and/or Italy are forced to ask for a bailout, it will need more money or the game is up. So then the issue of a banking licence for the ESM to allow the ECB to fund the ESM indefinitely and infinitely will come to a head. As you say, Merkel is gambling on that not happening. But so far, the debt crisis has not gone away but spread further.

  4. I don’t agree that she blinked; more like she winked. I do most certainly agree that the debt predicament hasn’t, won’t, can’t go away; not with a fiscal union, a monetary union, a political union, or banking union.

    Bottom line is, as always, the bottom line. Germany’s commitments have not increase one speck. The ESM is too small; Eurozone or EU bonds aren’t going to be issued; and the banking license for the ESM so it can borrow from the ECB? Possible? Certainly? But.. what assets can the ESM utilize to secure the loans without the ECB’s balance sheet in essence quintupling?

    I think this all part of the endgame for the monetary union, and the very notion that could be some sort of the United States of Capitalist Europe.

    Anyway, it’s all a bit of speculation and we know where that winds up…

  5. I am writing from the Third World Network ( in Penang, Malaysia. We are a non-governmental organisation engaged in research and advocacy on Third World and development issues.

    Would it be alright for us to reproduce your piece above in our monthly “Third World Resurgence” magazine? We will be sure to acknowledge this blog as the source and include the URL.

    In the event that we may reprint the article, how may we describe you in the author bio?

      1. Thanks very much, Michael, for the reprint permission. As mentioned, we’ll be sure to credit the source.

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