EUROPEAN DIARY:EU LEADERS are getting ready for their first summit of the year next Monday, a meeting at which they hope to finalise the new fiscal treaty. Ringing in their ears, however, is the sonic boom of ever-urgent pleas to boost their bailout funds.
This one simply won’t go away. Even if the atmosphere these days is a little less gloomy, the sense remains that Europe is stuck in a moment of uncertainty and peril.
The weary denizens of political backrooms in Brussels still insist that stalled talks in Athens will yield an agreement to cut the Greek national debt by as much as €100 billion. But this is high-risk stuff — and the prospect of a catastrophic default rises every day a deal is not done.
Enter the International Monetary Fund, whose chief, Christine Lagarde, was in Berlin on Sunday for talks with Chancellor Angela Merkel. In a speech the next day, Lagarde warned of a nasty 1930s-like vista if Europe does not tame the crisis.
To guard against toxic fallout from the febrile situation in Greece, she is agitating for a big expansion of the nascent ESM permanent rescue fund and its combination with the outgoing EFSF temporary fund. If no such move is made, she warned, Italy or Spain could face a “solvency crisis”.
This is conventional wisdom in many quarters by now; Italian prime minister Mario Monti has made similar demands to boost the rescue funds in recent days and did so in Berlin.
Indeed, a senior European official familiar with the pre-summit manoeuvring of euro zone leaders says “a big majority” of them are in favour. Although EU leaders are due to open talks on this front in March, moves are under way to jump-start the debate.
Euro zone sources say European Council chief Herman Van Rompuy is pressing for a doubling of the ESM’s lending capacity to €1 trillion when it comes into force in July and for this to be combined with some €250 billion in residual firepower left unused in the EFSF.
That’s hardly small change, but some euro zone countries argued that €2 trillion was required.
The naysayer, as ever, is Merkel, although she is aided and abetted by her Finnish and Slovak counterparts and is presumed to enjoy Dutch support as well.
So here we are again, waiting for Angela. The expectation in Brussels is that the chancellor will come on board eventually, but that is not a given.
Berlin tartly dismissed a front-page Financial Timesreport the other day that a rethink was in store. German officials continue to hold the line that the present firewall is sufficient. Only in extremiswould a boost be contemplated.
Hardly anyone believes this is sustainable any more.
The fear remains that such a stance risks creating a self-fulfilling cycle in which the very failure to protect against the consequences of a Greek flameout contrives to make disaster more likely.
This has happened many times before in the present debacle. No one takes any comfort from the notion that Europe has now learned its lesson and won’t let it happen again. Logic suggests it should, of course, but political prerogatives and logic often diverge.
Thus we see the chancellor harried by her two coalition partners, the conservative Christian Social Union in Bavaria and the liberal Free Democrats. The CSU is very jittery over the rescue funds and the Free Democrats, whose support has collapsed, attribute much of their misfortune to the government’s European policy.
Not even the unloved fiscal treaty – the chancellor’s initiative, after all – is enough to encourage a change of heart. To German eyes, according to senior European sources, the treaty is seen as the quid pro quo for the second Greek bailout. Those who anticipate that the pact will lead to some kind of movement to back eurobonds should think again. That’s still heresy in Berlin.
In Brussels and beyond there is no little frustration at this state of affairs.
Although markets have been relatively calm, the expectation remains that tension will build up again radically as talks grind on with Greece’s creditors.
Yet another political deadline looms on Monday, but many close observers believe an agreement with the country’s creditors won’t be in place by then. There is more. With Greece now in its fifth year of recession, there is little confidence in its leaders to implement a drastic reform and austerity programme and no alternative under discussion.
In the outside world, meanwhile, patience is fraying rapidly. Lagarde is widely held to have told Merkel that the G20 powers outside the euro zone will not increase their own support for the IMF without movement in Europe on the bailout funds.
All of this presents a huge political challenge. Constitutional lawyers will have a jamboree with the treaty but it will do little on its own to beat down the flames. Time is running out.
