Buying time essential to resolution of euro crisis


BY THE time the fourth anniversary of the collapse of Lehman Brothers is marked in just over 10 days’ time, much may have changed in the euro crisis. Unusually for Europe these days, a considerable amount of that change is likely to be for the better.

Tomorrow week, the German constitutional court will rule on the euro zone’s permanent bailout mechanism. Although nothing is ever certain when lawyers are involved, those who watch the Karlsruhe court do not expect its judges to torpedo the European Stability Mechanism (ESM).

Provided they do the right thing, it should remove a considerable source of uncertainty.

On the same day, Dutch voters will go to the polls to decide who they want to govern them. Despite much excitable talk about the rise of extremism in Europe – with the Netherlands’ Geert Wilders frequently pointed to as an example of the phenomenon – opinion polls have consistently indicated the hard right coming a distant third.

The revived, hardish-left Socialist Party is running neck and neck with the conservatives who lead the outgoing coalition. The socialists are against bailouts for peripherals and against abiding by EU budget rules, but even if they form part of the new coalition – something that is far from certain – their hardline stance will be watered down.

In short, the election is very unlikely to throw up any surprises that would worsen the crisis in the euro zone or make its resolution significantly harder to achieve. As such, another source of uncertainty should be removed once its outcome is known late next week.

Next Monday the European Commission will set out plans for a European banking union. Negotiations among the member states will be so difficult that agreement is far from assured but, in European affairs when countries task the commission with drawing up a blueprint on an issue, usually something significant eventually happens.

It is, of course, possible that the crisis spins out of control before a meaningful banking union can be agreed and put in place. But with the commission’s plan as a detailed basis for negotiations, the prospects of real and effective change to the structures of the single currency are as good as they have been for a long time.

But time is an issue. Buying more of it is essential.

The European Central Bank is in a position to buy a lot of time. As of now, every indication points to it doing just that on Thursday.

Although ECB chief Mario Draghi has under delivered previously, he last week outlined a step change in the bank’s crisis response centred on a new, bigger and better designed bond-buying programme.

Draghi is set to unveil it formally on Thursday, when he may also trim interest rates for good measure.

Yesterday’s surveys of business sentiment across the region – the purchasing managers’ index (PMI) – gives him additional cover to resort to unorthodoxy. The August PMIs from around the continent suggest the European economy will remain in recession in the third quarter of the year.

But if the first half of September is likely to prove an unusually good fortnight in the crisis, don’t expect it to last.

Things are going badly in Italy, the world’s eighth-largest economy and the second most indebted of the large, rich economies.

Uniquely among the big European economies, the PMI reading for Italy pointed to an accelerating rate of decline in economic activity.

That, along with acute political uncertainty in the lead up to, and most probably after, next April’s election, gives Italy more characteristics in common with Greece than anyone wants to see.

Nor have the deep divisions in Europe on how to handle the crisis gone away. Draghi cancelled his trip to the world central bankers’ annual get-together in Jackson Hole, Wyoming, last weekend. This is a major event and to pull out at short notice – citing work pressures – hints at the likely extent of disagreement in Frankfurt.

The second central bank chief in that city – the Bundesbank’s Jens Weidmann – continues to be openly critical of bond-buying in all its forms. And it is not only the monetary purists in Frankfurt who oppose the move; many in the political establishment in Berlin bridle at the proposed measures. Yesterday, the economy minister, Philipp Rösler, felt obliged to criticise bond-buying too.

If differences on the policy response are set to continue if not intensify, more drama from Greece is likely later in the month. The troika is due to report before the end of September. Greek exit talk will reintensify, and all the peripherals will likely suffer contagion.

By the beginning of October we may well be back to the new normal of chronic and seemingly unending crisis.

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