ANALYSIS:EUROPE'S TORRID debt emergency seems to worsen by the day. As political divisions deepen over the response to the crisis, markets are in a state of panic and fears are growing of a new explosion in the banking sector.
Is there any end in sight? Not soon. The scene is more volatile than ever, but the discredited strategy of muddling painfully through the mire remains the only show in town. While this reflects the intractable political problems thrown up by the debacle, it does nothing to dispel anxiety that the situation could end in disaster.
In Strasbourg the other day Poland’s loquacious finance minister Jacek Rostowski declared that Europe risks a return to “war” if it fails to keep the single currency intact. This was shrill stuff indeed and smacked of hyperactive imagination.
But the sense remains the no one really knows how things might shake out in the rocky weeks ahead.
Last week the Dutch government raised the unmentionable prospect of expulsions from the euro zone. This still seems unlikely in the short or medium term, but strain on the 17-country single currency is showing as never before.
Frailty is everywhere. The Greek bailout is teetering, default risk is rising, inter-bank money markets are drying up and French lenders are under siege.
In Rome, meanwhile, a political melodrama with X-rated undertones plays out in the grim shade of an alarming spike in borrowing costs. It’s hardly a panorama to inspire confidence.
Back in Dublin, the Government has brushed away a suggestion from the top echelon of the European Central Bank that it might be in order to intensify the austerity drive.
In Frankfurt, home of the ECB, they say Ireland would do well to take further steps soon to insure itself against the tidal wave of turmoil. Yet from Iveagh House and Merrion Street comes the riposte that the man who delivered the message, executive board member Jürgen Stark, is working out his notice. The current plan is on track, they declare, Ireland is meeting its side of the bargain.
Whether that is enough may well be tested before long. Even as Dublin insists the wider EU-IMF “troika” is not looking for more cuts, the sense right now is that the present upsurge of tumult changes the rules of engagement for everyone.
At the heart of it all is Greece, which is running out of cash as a brutal recession quickens. The government has wavered again on its austerity drive, triggering dire warnings that new rescue aid might be blocked if it does not come good.
Default talk has flared up in Berlin, sending panic-prone markets into another frenzy even as Chancellor Angela Merkel insists she will not hear of the notion.
First in the firing line are French banks and others with big holdings of Greek debt, but the use of ECB support is increasing in the euro zone banking system generally. Pressure for bank recapitalisation is up; politicians quake at the prospect.
As the firefight continues, the question arises as to what more can be done. The picture here is a many-layered one, with policies in play for the short and medium term alongside longer-term initiatives which could lead to a big leap forward in euro zone economic integration. On each front the stakes are huge.
In the immediate sense, euro zone countries are being urged to dash ahead with the ratification of reforms to reinforce the European Financial Stability Facility (EFSF) bailout fund. These have been approved in five countries – Ireland is not among them yet – but Estonia is dragging its heels and delays have also emerged in the Austrian parliament.
These reforms would give the fund the power to intervene in sovereign bond markets, mimicking ECB operations which have calmed bond markets but which have sown deep divisions on its board.
Other outstanding issues include a Finnish push for collateral from Greece and questions over the level of private creditor support for a “voluntary” scheme to participate in the country’s second bailout. These matters seem unlikely to be settled at the Wroclaw meeting, which continues this morning. The talk here, however, is of new measures to expand the EFSF’s lending “efficiency”. The fund’s present lending capacity is about€260 billion but preparations are under way to increase that to €440 billion in line with the total amount of the guarantees it receives from euro zone countries.
Under discussion is whether EFSF can be given the right to provide cross-guarantees to the ECB for any losses it incurs on the sovereign bonds it buys from the market. Notwithstanding the divisions on the ECB’s board, this leveraging of EFSF guarantees would reinforce the ECB’s firepower in bond markets.
The technical details need not detain us. The essential point is that moves are again under way to expand how the fund operates. Only last month, Merkel dismissed a call from EU Commission chief José Manuel Barroso to increase its lending capacity.
Things have changed radically, however. Italy came perilously close to the edge last month and a bond auction this week came at a record price. In a gruelling war of attrition, these were big setbacks. Like Spain, the country is “too big to fail” and “too big to save” with the present rescue tools.
Thus the attendance of US treasury secretary Timothy Geithner at an early morning meeting of euro zone ministers was taken as confirmation that other global powers want Europe to get a move on. Urgent words yesterday from Geithner follow similar sounds from Chinese leaders, whose investment decisions now have the power to make a bad situation in the euro zone worse or better.
In the backdrop comes renewed talk of eurobonds, as sovereign debt issued with a common euro zone guarantee would be known. Barroso is pushing hard here but Merkel is still resisting.
This is long-term stuff, with treaty change required and a very big shift in fiscal sovereignty to the centre.
To compensate the strongest countries for the increased risk they bear, it would be difficult to avoid a big loss of economic autonomy for small countries like Ireland.
Embracing eurobonds might take the sting out of the crisis, but they would come at a price.
Arthur Beesley is European Correspondent