The euro crisis dominated EU affairs in 2011 and probably will again in 2012, as leaders fail to come to grips the issues, writes ARTHUR BEESLEYin Brussels
EU LEADERS face a daunting challenge in 2012 as the quest continues for a lasting salve to the debt debacle. After a second year of upheaval and blunder, they have yet to fully confront the danger that the emergency could blow asunder their cherished single currency.
It is not for lack of trying. In 2011 the leaders gathered in conclave at a record eight summits in Brussels, along with dozens of bilateral meetings around Europe. For all their infighting, they still took numerous initiatives to soothe the storms of contagion – but none was sufficient.
The turmoil grew only worse, taking down government after government as the rot spread from downtrodden “peripheral” countries such as Ireland to the wealthiest bastions of fiscal probity and rigour. With the triple-A credit ratings of Germany, France and their most powerful allies under threat, the biggest crisis in five decades of European integration casts a huge pall of gloom over the global economy generally.
In many ways, the parameters of a solution are clear enough. For Europe to overcome the crisis, political leaders will have to deliver on five fronts: tougher enforcement of EU budget rules via treaty change; a second Greek rescue; bigger bailout funds; a costly reinforcement of the banking sector; and the averting of a slide into recession. The big question is whether they have the gumption and staying power to deliver all that, and more besides.
For Dublin, the answer will determine in part whether the Government can extricate itself from the clutches of a humiliating international bailout. If that remains the most fundamental task before Taoiseach Enda Kenny, an additional challenge looms in the form of a prospective referendum on treaty change. To sweeten the pill, Kenny may well demand concessions to reduce the burden of Ireland’s mountainous bank debt. But with years of grinding austerity still to come, there is little doubt a public vote on any European question would represent a huge hurdle to surmount.
No matter that the Lisbon and Nice treaties were accepted at the second attempt. Two referendum defeats in seven years mean this is inherently risky territory for the Taoiseach and his administration. That the debate takes place in the shadow of a nasty dispute over corporate tax with French president Nicolas Sarkozy and German chancellor Angela Merkel only adds to the tension. Kenny won out eventually, extracting a big cut in the interest rate on the EU-International Monetary Fund pact without yielding on the tax.
Bitterness lingers, however, and any deviation from the arduous course set by Ireland’s sponsors would spell trouble again.
Although the Government brushed off pressure from the European Central Bank (ECB) to revisit the Croke Park deal, its faithful adherence to the plan led to high praise in Europe for Kenny and his lieutenants. But nothing can be taken for granted in this game. Kenny’s predecessor Brian Cowen laboured in the false glow of Europe’s approval before Ireland crashed through the ice in the autumn of 2010.
The hand that gives can take away as well. Having received more than €30 billion in emergency loans in the first year of the bailout, Dublin’s bargaining position is frail to say the least.
Promises were kept, however, unlike in Greece. Months of melodrama in Athens culminated in the installation of a technocratic government under former ECB vice-president Lucas Papademos. The immediate catalyst for the changeover was a botched call for a referendum on the bailout by former prime minister George Papandreou, an unexpected manoeuvre which led Merkel and Sarkozy to raise the prospect that Greece might leave the euro zone. Their forceful ultimatum that the now-abandoned referendum should be framed as a choice between Greece staying in the euro or leaving marked a stunning intervention in Greek internal affairs. For many observers, it brought into the public domain the kind of pressures that are exercised in private.
At another level, the ongoing efforts to seek a bailout contribution from private investors in Greek debt brought Europe closer than ever to the prospect of a sovereign default within the euro zone.
In a related development, markets were rattled by Merkel’s Deauville accord with Sarkozy to compel investors to bear losses in future bailouts. At the highest levels in Europe, this is still perceived as the gravest political error made in the crisis. But it was only in the maw of contagion that this condition was watered down in the final Brussels summit of the year.
Many other leaders succumbed to the crisis, the most prominent among them being Silvio Berlusconi in Italy. Seemingly oblivious to the scandals surrounding his colourful carnal life, the billionaire media owner was abruptly replaced by a technocrat premier, Mario Monti, as Italy faced crippling borrowing costs. Spanish prime minister José Luis Zapatero lost power by more conventional means, his flagging socialist administration ousted by centre-right leader Mariano Rajoy in an early general election.
The ECB is buying up Italian and Spanish sovereign bonds, but insists the campaign is strictly limited. The ever-present risk that one or other of these two countries might be shut out of private debt markets stirred no end of anxiety in Brussels and beyond as the authorities confronted fears the European Financial Stability Facility – a temporary bailout – and its permanent successor were not big enough.
However, successive attempts to boost Europe’s “firewall” were dogged by indecision, the reluctance of donor countries such as Germany to increase their national guarantees and the refusal of private and non-European sovereign investors to part with their cash.
This unresolved question fanned a steady clamour for deeper interventions by the ECB, something Ireland supports. However, the bank’s new chief Mario Draghi has doggedly held the line that becoming a lender of last resort is both forbidden by the European treaties and would destroy its credibility and that of the euro zone at large.
EU leaders have pushed into 2012 the resolution of the treaty change question and the uncertainty over the EFSF’s firepower. While opinions vary as to the exact amount of money in play in 2012, further ructions seem inevitable. Estimates suggest €300 billion in euro zone sovereign debt falls due in the first quarter of the year, in addition to €250 billion in bank debt. A further €200 billion of corporate debt – in the form of “toxic” collateralised debt obligations – also falls due across 2012.
In the third year of crisis, uncertainty abounds.
Arthur Beesley is Europe Correspondent
