Euro crisis building again on several fronts before ECB meeting

 

Thursday’s ECB meeting will test its president Mario Draghi’s promise to defend the euro, writes DEREK SCALLY

EUROPE’S LEADERS are on holiday but the euro crisis remains hard at work on at least three fronts.

The first is Spain and its cost of financing, stuck on the wrong side of the unsustainable 7 per cent mark. Was this what European Central Bank president Mario Draghi was referring to last week when he promised the ECB would “do whatever it takes” within its mandate to defend the euro.

That is the hope of financial markets and a southern Europe group led by France. It’s a different story at the Bundesbank in Frankfurt and other northern European central banks, from the Hague to Helsinki, that share a rigorous, narrow view of the bank’s mandate – to preserve price stability.

After a year of wishing and hoping the Italian ECB president was one of them, they fear his London remark was the precursor to a rude awakening at Thursday’s ECB governing council meeting.

Another round of bond-market interventions to aid Spain and Italy would, the northerners fear, show the world such ECB interventions are not once-off but now standard practice.

But was Mr Draghi really talking about bond-buying? Some German critics of the practice – through their house journal, the Frankfurter Allgemeine newspaper – suggested yesterday the talk was actually about the second crisis front: Greece.

The tone of Mr Draghi’s promise was, they suggested, far too dramatic to flag another round of Spanish bond-buying.

What if, they suggested, Mr Draghi’s talk of “doing whatever it takes” to defend the euro – echoed in recent days by French, German and Italian leaders – was also semantic preparatory work for a Greek departure from the currency bloc? Chancellor Angela Merkel’s coalition allies are using her holiday absence to predict just that. When the next troika report reveals programme slippage and a new funding gap, they say, there is no political will in Germany to fill that gap, making exit inevitable.

Which leads to the third euro zone front on the move: Ireland. After his recent meeting with Michael Noonan, Mr Draghi is fully aware of the Government’s expectation for the autumn. Ireland wants political agreement among European leaders on a deal to reduce the burden of banking debt, the details and implementation of which can be worked out later.

This is how Dublin reads last month’s summit conclusions, which promised to “examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme”.

But there is no sense of urgency in Berlin’s reading of the same sentences. Thinking here is that any bank debt deal for Ireland would, by default, require a huge boost in the volume of Ireland’s bailout programme. How, Berlin officials argue, can we sell something like that to bailout- weary German voters who have been told Ireland is an anti-Greece, a poster boy for reform success?

The issue to be teased out here is how far Berlin is prepared to go – politically and financially – to keep on track the Irish bailout success story it needs for its own domestic crisis narrative. Is a technical compromise possible that, like bond buy-ups, may bend ECB rules while offering enough to keep Dublin and Berlin happy?

This appears to be the question Mr Draghi was putting to his governing council colleagues over dinner earlier this month. According to Der Spiegel, he lost his cool while arguing Ireland’s banking debt cannot be solved simply with “legal discussions”.

Such thinking, however, is the basis of the rules-based, orthodox Bundesbank culture. After already accepting bond-buying programmes under protest, the Bundesbank fears creative thinking on Ireland is the latest step on the slippery slope to creative accounting elsewhere and diminished influence of the ECB’s northern members.

Despite years of crisis, this group insists “legal discussions” of the euro zone crisis are the only ones worth having at ECB governing council meetings. The central bank should stay inside its mandate to preserve price stability with inflation of about 2 per cent. Everything else is the realm of politics. The crucial issue here is whether the Bundesbank still has Berlin behind it.

In this multifaceted crisis, developments in Spain and Greece and a boardroom battle in the ECB will have a knock-on effect on Irish hopes for the autumn.

If, as is likely, Dr Merkel backs away from the Bundesbank and quietly goes with the flow on a Spanish bond buy-up, can she show similar pragmatism on Ireland’s banking debt?