The combined Eurozone and European Council summit held in Brussels on June 28-29 was a “breakthrough” that produced “real progress”, the mainstream media insisted, because German Chancellor Angela Merkel “backed down”.
For a few days post-summit, this reading was supported by market euphoria and sharp falls in the risk premium on Italian and Spanish public debt.
However, once fund managers took a closer look at the decisions of the 19th gathering of European leaders since the crisis broke in 2008, they realised these won’t put the euro out of danger ― even in the short term.
There was nothing offered on collapsing Greece, nothing on unsustainable public debt and no end in sight to deepening recession. The standard pattern of post-summit euphoria then fresh gloom continued. After a week, the risk premium on Spanish debt had returned to pre-summit levels.
But the summit’s decisions will achieve one definite result: it will boost the powers of the eurozone institutions most distant from, and unaccountable to, the people of Europe ― in particular the European Central Bank.
The final compromise was reached after an all-night session that pitted Merkel as champion of northern (creditor) Europe against Italy’s Mario Monti and Spain’s Mariano Rajoy (of the indebted eurozone “periphery”).
The compromise is raising political tensions within Europe, especially Germany.
The biggest breakthrough was the decision that the European Stability Mechanism be allowed to recapitalise eurozone banks directly, without funds passing through national budgets and adding to public debt.
Merkel had rejected this proposal at the June 21 Rome meeting with Rajoy, Monti and France’s Francois Hollande.
She accepted it in Brussels because the eurozone partners agreed to set up a common bank surveillance authority, and make any aid proposal subject to veto by member countries and come with strings attached.
Until that authority is set up, haggling over the detail will almost certainly drag out beyond the December deadline. This means Brussels’ 100 billion euro “line of credit” for recapitalising Spain’s zombie banks will continue to count as public debt.
Merkel also accepted that the European Stability Mechanism purchase the debt of eurozone members on the secondary market, as urged by Monti.
However, this will only happen if states abide by all their commitments to the eurozone and the European Union, including budget controls and, in the case of Ireland, Greece and Portugal, the conditions of their “bailouts”.
Each purchase of public debt will also be covered by a separate agreement and be conducted by the European Central Bank.
For Spain and Italy, the price of this “short-term relief” is they must commit to further “reforms” and even deeper cuts to public spending.
In Spain, the talk was of a further cut of 30 billion euros to an economy already deep in recession. In Italy, the plan is for a 10% cut in public sector jobs.
For France, the summit ended all talk of renegotiating the Fiscal and Growth Pact ― one of Hollande’s 60 commitments in his election campaign. Hollande has accepted proposals to cut 60 billion euros from public spending by the end of 2013.
The Hollande government is also under official EU pressure to reverse its decision to reintroduce retirement at 60, as well as to “liberalise” regulated sectors of the French economy, switch the burden of taxation to consumption and “ensure that the evolution of the minimum wage favours job creation and competitiveness”.
So just how much did Merkel “cave in”?
Progressive German daily Die Tageszeitung said: “Merkel followed a political cost-benefit calculation … A European Union summit without a result would have brought the euro’s implosion dramatically closer. But Germany already won in the EU long ago.
“Berlin has europeanised the German economic model by imposing the Fiscal and Growth Pact. The price will be paid by less export-focused nations being forced into rigid austerity.”
According to French Left Front leader Jean-Luc Melenchon, the pact, “prepared by Merkel and Sarkozy, will now be implemented as is”.
If the ratification process goes smoothly, the pact will give Merkel all she needs to generalise troika-style austerity on economies indebted beyond the euro area. For example, Italy will have to quickly reduce its public debt by half, from 120% to 60% of Gross Domestic Product.
Smoke and mirrors
But what about the 130 billion euros “Compact for Growth and Jobs”, which originated with Hollande as an antidote to the German obsession with fiscal balance and was adopted by the European Council on June 29? Surely that points to a more expansionary approach?
Financial Times commentator Martin Wolf found the right term for this program ― “a mere bagatelle”. Daniel Gros of the Centre for European Policy Studies described it as “old wine in new bottles”.
The compact “works” in three ways.
Firstly, by allowing already assigned EU structural funds worth 55 billion euros for 2013 to be reassigned by member states. They must decide which projects to cancel and which new ones to fund.
Neither this sum nor any funds left over from the 2012 allocation provide additional economic stimulus beyond that already in the system.
Secondly, the European Investment Bank’s capital base is to be expanded by 10 billion euros, allowing 15 billion euros in extra credit to the public side of public-private partnerships. The hope is this triggers an equivalent or greater amount of private investment.
But which firms are going to risk their funds in investments in crisis-stricken European countries like Greece and Spain, especially when, should they go broke, debts to the EIB have to be paid back first?
Lastly, European project bonds will allow private firms undertaking infrastructure projects to receive EU guarantees up to 1 billion euros, providing lower interest rates on financial markets. Again, the challenge is to find profitable projects and this “new” funding comes out of the existing EU budget.
The real status of the “compact” is window-dressing for French voters expecting an alternative to austerity. Hollande’s role has been to repeat that of former French prime minister Lionel Jospin, who in 1997 accepted the German-designed stability pact for the euro in exchange for a “pact aimed at promoting jobs and growth”.
Enough done this time?
But, all these negatives stated, do the summit decisions at least guarantee euro stability in the short term?
Not even that. Take the case of Italy, with almost 2 trillion euros in public debt on issue, while the total firepower of the European Stability Mechanism amounts to 400 billion euros.
If the European Stability Mechanism decides to buy Italian bonds to maintain their price above a given target level, the bondholders, fully aware of the size of the European bailout, will start selling their holdings of Italian debt to it.
It will rapidly face the choice of whether or not to keep buying, that is, of deciding whether Italian bond prices are to fall sooner rather than later.
In such a situation, the bondholders will have an incentive to sell Italian debt quicker rather than waiting for its price to crash. In doing so, they would bring on the very result they are trying to avoid.
The summit decision to use the European Stability Mechanism, with its finite kitty, to stabilise public debt markets will have the exact opposite effect, unless it can borrow from the European Central Bank (ECB) with no limit.
As matters stand, the bank will not agree to this because it is loath to award “lax behavior” by governments on the debtor periphery and to increase the proportion of low grade assets on its balance sheet.
So long as the ECB maintains this stance, the Eurozone is doomed to lurch from one crisis to the next.
Political tensions rising
Merkel’s success at Brussels was to make debtor country access to European institutional funding available only on terms that further entrench German economic hegemony. Yet this win has not been welcomed in Germany itself.
German economists, led by Hans-Werner Sinn of the Ifo Institute, are about to launch a public declaration against the proposal to make direct European funds available to “zombie banks”, on the grounds that this creates “collective responsibility for the debts of banks in the euro system”.
Because bank debt in the EU stands at about 30 trillion euros “it is virtually impossible to make the taxpayers, pensioners and savers in the thus-far stable countries of Europe liable for that debt … Conflict and discord with our neighbours is unavoidable. Our children and grandchildren will suffer.”
The economists’ campaign touches on the most sensitive nerve of all ― fear that the savings of ordinary German workers will be called upon to cover the losses of corrupt Spanish banks like Bankia.
This explains why 26 MPs from Merkel’s own coalition voted in the Bundestag against the fiscal pact. Supporters the Greens and Social Democrats, who had already abandoned Hollande for Merkel on the issue of common European debt (“Eurobonds”), are also starting to wobble on European bank supervision.
Merkel insists that there was no agreement in Brussel’ to set up a Europe-wide bank deposit scheme, but since euro rescue over the past two years has amounted to a chain of broken German taboos, trust in Merkel is slipping.
One danger for the parties that have supported the European Stability Mechanism lies in a potential revival of the Left Party (Die Linke), which on June 21 stated that “as single faction in the Bundestag we will unanimously vote against the fiscal pact”.
The party said: “We cannot say yes to a law restricting core democratic and parliamentary rights. We will decisively fight against passing the burden of the European economic and banking crisis onto citizens. We hope many parliamentarians of other factions will find the courage to say no, too.”