EU: from financial consolidation to deeper division
AFP PHOTO / GEORGES GOBET
Last week the 17 single currency leaders, who made a giant step forward towards a closer Eurozone union, went back home to pitch it to their respective member states; those on the giving side, namely Angela Merkel, who pretended that nothing has changed, while the ‘winners’ made it look like a gift, which it was not. As for the rest 10 governments, whose countries do not use the euro, they all appeared quite restricted, with David Cameron going as far as promising a referendum on Britain’s participation in the new closer Union.
At this point two questions arise. A substantial/financial one, about the true nature of the concessions made to Spain and Italy, and another more important political one related to the political Gordian knot, which is apparent for quite some time now and relates to the growing reluctance of the European citizens to accept Brussels as their capital. Let’s take one thing at a time.
What really happened?
As it usually happens, stock exchanges celebrated for one day on Friday 29 June, what it looked like a breakthrough in the unsustainable conditions that prevailed in the Madrid and Rome sovereign debt markets.
On Monday morning, 2 July, Asian stock exchanges had already returned to the red and Tokyo closed with a negatively. Unquestionably, the decision to recapitalise the Spanish banks directly with taxpayers money from the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) is a major step towards a viable arrangement for the country’s banking sector.
Yet this will be realised after the Eurozone’s supervision mechanism on the banking industry is in place, under the European Central Bank. In any case the recapitalisation of the Spanish banks will be realised, “on appropriate conditionality, including compliance with state aid rules, which should be institution specific, sector specific or economy-wide and would be formalised in a Memorandum of Understanding (MoU)”.
Will this MoU be like the ones now in force for Greece, Portugal and Ireland? The answer is no and yes, depending from the angle one sees things. Not forgetting that the Spanish banks will not be directly recapitalised by the EU financial instruments, the EFSF/ESM, until after a Eurozone-wide control mechanism is established on banks under the ECB. In the mean-time the Madrid government will be borrowing the funds to recapitalise the country’s banks. There is also a possibility that even the IMF is included as a ‘technical’ advisor to the EU, while enforcing the terms of the MoU on Spain.
Then what who is right? Mariano Rajoy, who said that “now we have a new European Union”, or Angela Merkel, that insisted “no gifts were made”? The German Chancellor is probably closer to the truth, at the exception of the seniority loss for the money ‘invested’ by the EFSF/ESM to Spanish banks. Obviously, the two political leaders are addressing different audiences and this is a strong indication that the political union is still far away, despite the talk about the contrary. Severe austerity imposed from Brussels causing high unemployment in the south of Europe have turned the political union of the EU a dreadful prospect for Greeks and Spaniards. At the same time voters in the North reject the idea of helping the ‘lazy’ southerners.
Let’s continue, however, on the financial decisions agreed in the early hours of 29 June. Again the intervention in the national sovereign debt markets by the EFSF/ESM through the structures of the ECB will be realised under a Memorandum of Understanding, imposing to the beneficiary governments a whole array of obligations, “respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure”. No need for the IMF here as a direct controller. The Fund can still issue its recommendations openly or even secretly to the ECB, as the bank of central banks. All EFSF/ESM interventions will be realised through the ECB. As they say the “devil hides in the details” and those details will be decided by the Eurogroup in its convention on 9 July.
The political division
All those new financial instruments meant to strengthen the bonds tying Eurozone members closer together, they repel further away the countries outside euro area. The European Union of at least two speeds is becoming more evident every day and this division creates EU centrifugal forces. In Britain for example, not to mention other smaller countries, the internal political scenery forces both the government coalition and the Labour opposition to favour more Eurosceptic proposals. It was exactly this line that Prime Minister David Cameron promised a referendum on the UK’s stance vis-à-vis the widely advertised in Brussels advancing political union of the EU. The same is true for the Eurozone members in the south. With unseen before unemployment percentages and severe austerity policies threatening the social cohesion in Greece, Spain, Portugal and Italy voters in those countries will not hesitate to support ‘patriotic’ political parties on both ends of the spectrum.
In Greece, the present coalition government of three parties under Antonis Samaras does not look like having a very long future. In Italy, the problems that the technocratic administration of Mario Monti now faces in both legislative chambers, left no options to him than to threaten the last EU summit with a total destruction, if Italy did not get additional support. As for the surplus Eurozone countries, Chancellor Merkel has insurmountable difficulties to convince its voters that Germany wins more from Eurozone than it pays to save it.
If the growth Pact fails to revive the ailing economies of Eurozone, the entire European Union, and the entire western financial system, will tremble.
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