Situation in euro zone as stark as ever and decision time is nigh


EUROPEAN DIARY:Europe must settle a plethora of other niggling questions before a deal is done

AS EUROPE’S leaders return to the fray after the summer holiday, the immediate focus of their attention is on the European Central Bank and its phlegmatic chief Mario Draghi.

Whether he can deliver a convincing plan to shore up Spain and Italy when the bank’s governing council meets today in Frankfurt may well set the tone for another busy round of politicking that could finally determine the fate of Greece and that of the single currency at large.

Europe has been in nervy make-or-break mode for the best part of three years but the sense these days in Brussels is that the time for definitive decisions is nigh. We will know soon whether that comes true. Notwithstanding the abundant political difficulties presented by the debacle, the frustration at the failure to make appreciable progress is palpable.

For Ireland, expectation centres on the pledge from EU leaders to review the bank debt burden.

The ardent hope in Dublin is that a deal will be done by the end of next month, but Europe must settle a plethora of other niggling questions first. All the better if that gives Taoiseach Enda Kenny and Tánaiste Eamon Gilmore some leeway to settle growing, internecine coalition tensions. In advance of a difficult European negotiation, loose talk from restive troops about an early election cannot inspire confidence on the other side of the table.

Top priority in Brussels right now is the push for clarity over the ECB’s role and agreement on onerous new terms for the second Greek bailout. Then there is a looming ruling from the German constitutional court on the legality of the ESM permanent bailout fund, the Dutch election next week, the economic slowdown generally and ponderous background talks on yet another institutional revamp for the euro zone.

It’s a huge agenda but the authorities believe there is no realistic alternative to muddling through the mire.

Simply put, the unspoken strategy is for the ECB to provide enough comfort to Spain and Italy to give prime ministers Mariano Rajoy and Mario Monti more headroom to steer through increasingly contentious and politically damaging fiscal reforms.

At the same time, the aim is to isolate the Greek problem. The dangers inherent in any return to the drachma mean it’s anyone’s guess as to whether that can really be done. The basic idea is the second bailout will be cast with the implicit proviso that the entire deal will be scrapped – and with it Greece’s membership of the euro – if there is any more slippage.

The imponderables, of course, are as numerous as they are prickly.

Can Draghi bring naysaying Bundesbank chief Jens Weidmann on board for a new bond-buying campaign? Could such a campaign actually work? Will Greek leader Antonis Samaras do the business or might his determination wilt? Will German chancellor Angela Merkel ease any of her hardline positions? There is no mistaking the heightened anticipation that surrounds today’s gathering in Frankfurt. This gained force yesterday when Jean-Claude Juncker of Luxembourg, leader of the euro zone finance ministers, declared that he would attend to set out the ministers’ appraisal of the scene.

In official circles, the sense is that soothing summertime words from Merkel are enough to give Draghi cover to override Weidmann, who has not shirked from publicising his distaste for bondbuying. Although the public airing of such divisions used to be anathema for ranking central bankers, they illustrate that the ECB is setting forth yet again on to new ground.

In private talks with MEPs on Monday evening, Draghi suggested the ECB could buy sovereign bonds with a maturity of up to three years. The bank already has bonds worth €210 billion on its books from previous acquisitions of Greek, Irish, Portuguese, Spanish and Italian bonds. That initiative was scrapped many months ago as the ECB embarked on a €1 trillion cheap loan scheme for banks which ultimately failed to settle the crisis.

The difference this time round is that any bondbuying would be specifically tied to the execution of a reform programme initiated following a formal application for bailout aid. This raises tricky questions about the action to be taken by the ECB should the government in question fail to implement the plan.

Further doubt surrounds the inevitable stigma attaching to any request for external aid. Neither Rajoy nor Monti wants to do that but they may yet have no choice. At the same time, the very lack of a commitment from the ECB up to now has only hardened their resolve to seek more from the bank.

Draghi and the ECB have disappointed before so there is no certainty that they will deliver something big enough to appease the doubters. A period of relative summer calm may have given Europe a chance to catch its breath but the situation in the euro zone is as stark as ever. Over to you, Mario.