Hopes dashed as nothing emerges from talks on euro area debt crisis

Tue, Sep 20, 2011, 01:00

ANALYSIS:The leaders do not seem prepared to do everything possible to avoid a collapse

HOW MANY euro area finance ministers does it take to change a light bulb? None – there is nothing wrong with the light bulb.

The single currency’s finance ministers were the butt of jokes yesterday after their two-day meeting in Poland produced precisely nothing. Again.

While all observers of the unfolding disaster in the euro area cannot but have sympathy for those shouldering the responsibilities of governing at a time of potential economic collapse, it is becoming increasingly difficult to avoid the conclusion that leaders are not prepared to do everything possible to avoid such a collapse.

Indeed, it seems after this weekend that they are not prepared to do much at all to stave off disaster. History will excoriate them if it comes to the worst.

Not for the first time, such a meeting dashed hopes.

By the middle of last week, having calmed the panic that politicians’ own talk of Greek default had triggered in the previous days, expectations had been raised that the meeting in Poland would end with the announcement of additional measures to combat the crisis, including ramped up international co-operation.

These expectations were heightened by two developments. First, on Thursday, the world’s hard currency central banks provided dollar liquidity to European banks – a major commitment and one that normally signals real problems.

Second, ministers invited their American counterpart, Timothy Geithner, to join the meeting.

But then on Saturday came the dampest of damp squibs. As the ministers broke up, no new measures were announced.

The US department treasury said of Geithner’s participation: “He did not advocate or oppose any specific policy prescriptions.”

They stuck to this line, despite ministers, including Michael Noonan, saying the American had suggested big changes to the European Financial Stabilisation Fund (EFSF), the euro zone’s emergency bailout pot.

But with the changes to the fund that were agreed on July 21st still making tortuous progress through many national parliaments, there is little desire to make further changes.

Those countries who have ratified the July deal would have to launch new parliamentary ratification processes, while the others would have to change ongoing processes in mid-course.

If concerns about problems with the legislative sausage grinder are understandable, some of the comments by European leaders were less so.

Luxembourg’s prime minister Jean-Claude Juncker, who chairs meetings of euro group finance ministers and is not famed as a lover of America, was plainly impolite in his rejection of Geithner’s suggestions.

“We’re not discussing the increase or the expansion of the EFSF with a non-member of the euro area,” he said.

Then why on earth was the American invited in the first place?

As Geithner’s proposal reportedly involved a role for the European Central Bank, the head of Germany’s central bank predictably chanted his ultraorthodox mantras.

“The EFSF’s sole purpose is the financing of states and that’s in order as long as it’s done via the capital market. If it’s done via the central bank, it constitutes monetary state financing,” said Jens Weidmann.

With hopes of greater action dashed by the non-response over the weekend, the only surprise yesterday was the market reaction to politicians’ inaction.

It could have been a lot worse than it was. The euro lost half a cent against the dollar and bank shares suffered further falls, but peripheral bond yields held steady in most cases and, where they rose, it was not by amounts that would signal alarm.

But all it takes for the slide to resume at times of such extreme fragility is one piece of bad news. That could come any time. It may well come on Thursday when important surveys of national manufacturing industries are released. If they show that a six-month downward trend continued into September, the prospects of a double-dip recession will rise. That could be enough to convince even more investors that Europe won’t manage to muddle through.

If panic breaks out this week there is some comfort in the knowledge that the world’s finance ministers and central bankers will be around the same table.

They head for Washington later in the week for the biannual meetings of the International Monetary Fund and its sister organisation, the World Bank.

There is some reason to hope that greater pressure will be put on the euro area people.

Outsiders can sometimes see things more clearly than insiders, and leaders from outside the zone often appear more concerned about its woes than their counterparts within it.

Unlike the Polish meeting last weekend, the euro area ministers will be heavily outnumbered in Washington. A lot of persuasive peer pressure just might snap them out of their trance.

But don’t bet on it.