ANALYSIS:Increased tension between Berlin and Paris reflects the reality that the latest rescue deal, agreed only three weeks ago, is not working and the search for a definitive solution to the debt debacle grows more urgent
ANOTHER DAY of danger. No sooner do technocratic governments take office in Italy and Greece and the restive glare of markets turns to France and Spain. Contagion is spreading. The hunt for a definitive solution to the debt debacle grows more urgent.
The renewed tension between Berlin and Paris reflects the fact that the latest rescue deal, agreed but three weeks ago, is not working. French borrowing costs are at levels not seen for two decades.
Ahead of a general election in Spain next Sunday, Madrid paid the highest interest rate since 1997 to sell 10-year bonds. Spanish borrowing cost for 10-year money now stands at 6.78 per cent, perilously close to the 7 per cent threshold at which borrowing rates are considered unsustainable.
So it’s deadly serious. If weeks of drama in Rome and Athens served to obscure the growing troubles of Spain, the latest machinations come as something of a jolt. Just like Italy, Spain is “too big to save and too big to fail”.
There simply isn’t enough spare cash in the euro zone to take the country out of private debt markets.
This brings us back the ongoing Franco-German scrap over the involvement of the European Central Bank in the rescue effort. In months of wrangling before the last EU summit, French president Nicolas Sarkozy tried and failed to secure German support for the notion that the EFSF bailout fund could be turned into a bank by giving it the power to borrow from the ECB.
German chancellor Angela Merkel prevailed, leading to a complicated compromise deal in which the EFSF was supposed to draw investment from emerging economic powers such as China and Brazil. Neither country is interested, raising searching questions over the feasibility of the plan to expand the EFSF’s lending capacity to €1 trillion from €440 billion.
This brings Europe back to square one, and increases Sarkozy’s anxiety as he frets about France’s triple-A credit rating while contemplating a difficult presidential election campaign next year.
Thus the French finance minister, François Baroin, moved yesterday to revive the idea of ECB involvement in the leveraging of the EFSF. This is but a variant of the raging debate over the concept, resisted both by the ECB and Germany, of turning the central bank into a lender of last resort. That is forbidden by the EU treaties, but the increasing fear that the crisis may prove uncontrollable has led officials to think anew about long-dismissed ideas.
Not that Merkel is for turning. The line remains the same.
Turning the ECB into a lender of last resort would not stamp out the crisis, she insists.
“If politicians think the ECB can solve the euro crisis, then they are mistaken,” she says.
Round and round it goes, with no sign of a breakthrough, and the turmoil worsens all the time. In diplomatic circles, they say every delay increases the ultimate cost of the crisis. It seems that way again.
But there are other dimensions here, chief among them the continued refusal of the leader of the Greek conservatives, Antonis Samaras, to sign a letter pledging his party to execute his country’s EU-IMF bailout in its entirety. Euro zone ministers won’t release a crucial €8 billion until he signs up, money Greece needs to avoid running out of cash within weeks.
The IMF stepped up the pressure yesterday, saying it won’t release the next tranche of rescue aid to Athens until there is broad political support for the austerity measures linked to the loan. “It’s important that the unity government now shares its commitment to the implementation of the economic programme,” said its spokesman David Hawley.
Whether there can be any value in Samaras’s signature is another question.
The threat of a Greek bankruptcy hangs on his injured pride yet still he will not relent.
Difficult talks loom on a second bailout pact, which will see private Greek bondholders take a 50 per cent hit on their investment. With a fiendishly difficult programme to execute and an election on the horizon, the attitude of Samaras does not bode well.