The
Euro debt crisis is increasingly resembling the film Groundhog
Day,
without the comedic relief, of course. Every time the European
leaders appear to devise a long-lasting, concrete set of solutions
for the crisis, they are immediately discarded as insufficient by the
markets. The latest attempt of a compromise at the G-20 summit in
Cannes, France resulted in an agreement to set aside more money to
recapitalise the troubled European banking sector (which have taken a
hit with the partial default in Greece and the increasing uncertainty
around the currency), and increasing the effective capacity of the
European Financial Stability Fund – the bailout fund established in
2010 - to €1 trillion (although this will be achieved through
leveraging, which does not mean that the amount is immediately
available). German attempts to get funding from so-called BRIC
countries to help shore up the EFSF was unsuccessful, presumably
because these countries do not wish to contribute to helping maintain
the high living standards that Europeans have come to expect, and for
which they seek to emulate.
These measures, however, have done nothing to reassure the markets of
the sustainability of the Euro, with Italy paying a record high of
6.5% interest on 6-month bonds on November 25th
– an increase of nearly double of what was paid the previous month.
Even more incredibly, the only country that was thought to be immune
from the Euro crisis, Germany, failed to sell all €6 billion in
10-year bonds, with the Bundesbank being forced to purchase 40% of
the bonds. In addition to these worrying developments, the bond
yields of Eurozone countries are creeping ever upwards, forcing
speculation of bailouts for Spain, Italy, and even France. The
impracticality (most economists would say impossibility) of such
bailouts for the giant economies of the Eurozone has sped up the
search for an ultimate solution – to reach some kind of end game
for the Euro.
It
is obvious now to many commentators the previous dogma which stated
that the cause of the crisis was simply due to over-spending, lazy
continental economies was overly-simplistic, and did not acknowledge
the great advantage of the Euro to the big economies – particularly
Germany. Although Germany benefited hugely from the introduction of
the Euro, Chancellor Merkel is reluctant to contribute her fair share
for the saving of the currency. Instead, a German attitude to fiscal
matters is being demanded of all countries in the Eurozone –
particularly within the PIIGS countries – with the proviso that
Germany may shoulder some burden in the future.
The
political consequences of this attitude have been highlighted many
times in the media, with new technocratic, ECB-friendly governments
being appointed in Greece and Italy (without any general elections,
it must be added). The political crisis in Greece appeared to be
intensified by the Franco-German threat that it could be thrown out
of the Eurozone, if it does not play by their rules. Although this
threat could have been construed as a poker play by Merkel and
Sarcozy to shore up Greek resolve for austerity, it backfired
spectacularly and caused further turmoil to the already
fatally-damaged regime of George Papandreou.
The
gravity of the situation is being underlined by European leaders,
with many linking the fate of the Euro to that of the whole European
Union. EU President Herman Van Rompuy had previously said - "If
we don’t survive with the Eurozone we will not survive with the
European Union.". Nobody
expects short-term changes like beefing up the EFSF, or appointing
different governments in Italy and Greece to really solve the crisis,
and there are wildly different ideas on how to go about it. The
primary solution to this day has been for fiscal stability –
cutting spending and increasing taxes, as well as privatisation.
While some may view this exercise as essential for indebted nations,
it can also be argued that this course of action has seriously
depressed domestic demand, and caused the economies in Greece and
Ireland to deflate, which then requires harsher fiscal measures.
A
more long-term option available for policy-makers is for the
establishment of Eurobonds. This has been proposed by the European
Commission and remains a viable, though controversial, option.
Although the eventual make-up of Eurobonds is highly disputed, the
main premise of them is that the 17 members of the Eurozone jointly
issue a government bond, with a single bond yield for all countries.
This would lower the borrowing costs for risky, high-debt, high-yield
economies such as the PIIGS countries, as well as speeding up the
re-introduction of the bailout countries into private bond auctions.
However, it would also increase the costs for low-risk countries such
as France and Germany, and a trade-off of closer fiscal integration
would be an inevitable prerequisite for this measure.
An
increasingly likely option which is being pushed by Merkel and
Sarcozy is for tighter supervision of national budgets, with severe
penalties for countries that break specific targets. This is aimed
at preventing another Greek case of a country spending way beyond its
means, as well as increasing market confidence in the Eurozone.
There is a sense of déjà
vu
with this proposal, however, as it resembles the previous Stability
and Growth Pact – which Germany and France broke numerous times in
the past. To counter this similarity, it is planned that the
European Court of Justice would be given powers to ensure that
irresponsible governments are punished should they go beyond the set
criteria. Although this move would be welcomed by several European
governments, it would almost definitely requires Treaty changes, and
it is hard to see how these could be passed at the hands of the Irish
people.
And
finally, there is the spectre of a nightmare solution – the
break-up of the Euro itself. This is the scenario that everyone
dreads, but which increases in probability for every day in which
European leaders dither. The only certainty is that a final solution
to the Euro sovereign debt crisis will be fraught with more
political-wrangling, back-room negotiating - and will require a
genuine sense of compromise.
