As contagion worms its way into ‘core’ countries and danger mounts, the luxury of time is gone
IN BRUSSELS the other day I saw a demolition gang tearing down a row of decrepit old houses. Walls and masonry fell in, clouds of dust billowed from the rubble. For more than a fleeting moment, the scene appeared as an emblem for the debt crisis.
Banish the thought, you say, banish it now. Yet that is not easily done. After two years of turmoil, the debacle risks slipping beyond the control of EU leaders. As contagion worms its noxious way into “core” countries and recession looms, the sense that danger is afoot grows and grows.
Brussels is agog with rumour and speculation. Reports circulate hourly about dire new warnings, new lows on markets, vague new initiatives to stop the rot and political hand-wringing on an astonishing scale. “It’s not black and white any more,” says one euro-zone warrior. “It’s just black.” For Ireland, whose turnaround is predicated on the global recovery, the risk remains that the tidal wave of woe will dim the benefit from painful budget cuts and all the other measures taken to date.
EU leaders are confronted with the threat of imminent disaster. Germany flunked a bond auction last week, other triple-A countries are under pressure, the ousting of Silvio Berlusconi has done nothing to calm Italian borrowing costs and Spain’s incoming government might require an immediate infusion of rescue aid. It is an increasingly toxic scenario, made worse by heightened tension within the banking system.
For as long as the crisis was confined to small “peripheral” countries such as Ireland, leaders had the luxury of time to fashion a response. This proved inadequate, making the crisis worse. Now they do not have time.
Yes, the political system in Europe moves at a slower rhythm than the pace of seismic events in the outside world. As the crisis escalates, the widening gulf between the two fuels suspicion that Europe’s leaders will not be able to assert their authority.
At meetings tonight and tomorrow in Brussels, finance ministers will try again to find a way of activating the decision of their leaders to expand the European bailout fund via a leveraging of its assets. When that deal was done one month ago, the emergency was a lot less pronounced than it is now.
Thus we see the spectre of international financial institutions openly discussing nightmare scenarios. For example, the biggest broker for foreign exchange and government bonds, ICAP, declared yesterday that it has tested its trading systems to manage the re-emergence of national currencies.
Analysts at Japanese bank Nomura say a break-up the euro zone appears “probable rather than possible” in the absence of a decisive new intervention by the European Central Bank. Merrill Lynch issued a report examining the implications of any disintegration. Furthermore, Royal Bank of Scotland has acknowledged stress testing on the consequences of the single currency falling apart.
That these banks are based outside the euro zone may provide them with a level of comfort but it would not insulate them entirely. All of their examinations would be superfluous if European leaders made a convincing case that a solution was to hand.
They have not, and the fear now is that they cannot.
The problem they face is that the only way out of the cul-de-sac is to adopt radical measures deemed too poisonous when the crisis was at a more manageable level. The escalation of the debacle – and, therefore, the risk it carries – makes such measures all the more unpalatable now.
The solutions fall under two categories, the first being a drastic increase in ECB bond purchases to stabilise markets. Both the ECB and Germany oppose that. They fear an infringement of EU law, an upsurge in inflation and – most of all – a return to lazy policies by governments that would rather make use of an easy safety net than mend their finances.
However, they may yet have to swallow their principles to avert catastrophe. When Germany and France decided last week to stop publicly discussing the ECB’s role, it was portrayed as a setback for French leader Nicolas Sarkozy. French sources said otherwise, however, arguing that the manoeuvre meant chancellor Angela Merkel would criticise decisions of the ECB in advance.
The second option is the introduction of eurobonds, as debt with a common euro-zone guarantee would be known. Merkel remains opposed, yet whispers in Berlin suggest she might yet come around. Still, this would come about only at the price of a gigantic leap forward into some kind of fiscal union with deeply intrusive oversight of national budgets.
Ahead of an EU summit next week, EU leaders are trying to resolve within days issues that would otherwise take years to overcome. No one suggests they want to take a wrecking ball to the euro, but any fudge now could prove a fudge too far.
