ANALYSIS:The giant bailout for financially overstretched euro zone countries is necessary to stop the EU unravelling, writes ARTHUR BEESLEY
THE BATTLE rages. The distance travelled is long, but there is far to go before the disruption in European sovereign debt markets is finally contained.
The EU is in full-blown crisis mode, its institutions stretched to the very limits of their legal powers. The authorities crossed Rubicon after Rubicon as they threw tens of billions of euro at Greece’s fiscal mess, to no apparent avail. Now, just days later, they have pledged many hundreds of billions for Spain, Portugal and other weaklings should they ever need help. Will this finally spike the guns of contagion? In reality, it’s still too early to tell.
The turmoil went global last week, markets throughout the world taking fright at a haphazard European response to the relentless seepage of confidence from the single currency. So too did the war against it, the vast new EU/IMF plan being in part a reflection of rising concern in the US, Japan and Canada.
As alarm bells rang throughout the international financial system, the leaders of the 16 euro zone countries moved early on Saturday morning to escalate their efforts to prop up the euro.
US president Barack Obama was in phone contact on Sunday with German chancellor Angela Merkel as the 27 EU finance ministers gathered in Brussels on Sunday. As the talks dragged on, EU officials took care to keep the Group of Seven (G7) leading industrial nations in the loop. International Monetary Fund (IMF) managing director Dominique Strauss-Kahn spoke by phone several times with the EU meeting, which took place as the IMF board in Washington signed off on its €30 billion share of the Greek rescue.
In essence, said a well-placed source, the objective of the meeting was to agree something large enough to convince the markets that no euro member default was in prospect and that speculative attacks based on that supposition were futile. The talks were hampered for a time by the sudden illness of German minister Wolfgang Schäuble. That the British, Dutch and Belgian ministers serve caretaker governments added a further layer of complexity, a senior source said.
The longer the talk continued, however, the greater the wall of money pledged. Word circulated late on Sunday evening that a €500 billion European package was on the cards. At 1am diplomats from several member states told reporters that the IMF was in for €100 billion. After 2am, when the deal was finally done, it emerged that the IMF would provide up to €250 billion on top of loan guarantees for €440 billion from the 16 euro countries and €60 billion from the European Commission.
These are eye-popping sums. Taken with the rescue fund for Greece, the European and global authorities have now pledged no less than €860 billion to throw the yoke of tumult from their backs.
In dollar terms – and it’s in dollars that the markets count – that’s the equivalent of $1.22 trillion.
Such figures take no account of the hundreds of billions that might be involved in a new European Central Bank (ECB) intervention to buy up government debt from euro countries. This provides an alternative source of funding for distressed euro countries if the private market dries up. After central bank chiefs throughout the euro zone held a series of telephone conferences on Saturday and Sunday morning, ECB vice-president Lucas Papademos travelled to Brussels to inform ministers of the new policy.
As with promises of help for Athens, the hope is that the EU/IMF money will never have to be drawn down. Although the situation in Spain and Portugal may not be as grave as in Greece, the latest plan was conceived amid increasing fear of a shut-down in sovereign debt markets. Even if they never draw down aid, Madrid and Lisbon will have to accelerate corrective action to heal their public finances. If they seek assistance, draconian IMF-style austerity would be in the offing.
In the hothouse atmosphere that currently prevails, other countries may also come under pressure to quicken efforts to balance their books. However, Minister for Finance Brian Lenihan says there will no early budget in Dublin.
How things change. It was three months ago to the day that EU leaders pledged “determined and co-ordinated action” to help Greece if the evil day ever came, but failed to spell out what they actually meant. The first pledge of real cash didn’t come for another two months, when euro countries promised €30 billion and the IMF promised €15 billion. Within three weeks, the total Greek fund was increased to €110 billion. This was just eight days ago. The word “unprecedented” was widely uttered at the time. Already it seems like a distant memory.
The coming days will bring a host of new tests for the plan as national government make their own preparations to give life to the initiative.
For the European authorities, all of this raises searching questions as to whether they will be able to impose tougher budgetary surveillance on euro countries.
The objective – in plans that the European Commission will publish tomorrow – is to ensure that wayward public finances in one country never again threaten all the others. In a currency area whose members pursue 16 different economic policies, the Greek debacle shows how easily fiscal laxity in one country can contaminate the rest. Ensuring the lesson is learned, however, will be tricky. This is especially so given the political sensitivities that inevitably arise in domestic economic policy.
But the markets have flexed their muscles. The weak will be punished – and punishment brings weakness down on all. In the face of existential peril for the euro, the currency’s members have taken the nuclear option. The stakes could hardly be higher.
“Unravel the euro and you unravel the EU,” says a diplomat.