Even if Greeks do not leave, EU must escape fiscal mire


OPINION:Paris and Berlin are at odds as a shaky edifice must somehow solidify its crumbling union

EUROPE’S LEADERS face momentous decisions in the coming days as they strive to shore up the battered single currency. At issue is whether they can settle a fundamentalist schism over their response to the expanding debt crisis. The very viability of the euro is at stake.

This is no overstatement. The Greek election tomorrow could lead the country back to the drachma. The week-old bailout of Spain’s banks is teetering, threatening a long-delayed effort to contain the storm. Italy already feels the simmering heat of contagion.

This spells danger everywhere yet consensus is as elusive as ever. Even if Europe is slouching towards a “banking union” and a “fiscal union”, conceptions differ radically as to what these notions actually mean in practice. It is in this arena, however, that the next phase of the battle may well be fought.

There cannot be a leader in Europe who would not agree that more needs to be done quickly, but they still cannot agree on what. Each of the big players thinks they have the right stuff and that the naysayers are plain wrong. Exhaustion and fear are in the air, frustration too that the rescue strategy is not working, and there is annoyance to be back again in the dreaded cul de sac of woe.

Some weary top-level figures thought a €1 billion European Central Bank cash injection into the financial system would provide fully three years of respite and calm. It lasted only months.

In previous moments of alarm, Europe just about managed at the very last minute to leap further into a novel world of sovereign bailouts and intrusive external supervision. None of this did the trick, however. As the situation worsens, the sense grows and grows that the ultimate moment of reckoning may soon be upon us. Spain might need a full-blown bailout, overstretching the rescue funds. The threat of anything similar for Italy could be fatal.

But the divisions are deepening. The struggle to salvage the common currency seems to have assumed a quasi-religious aspect, as if the resolution of a severe economic and financial conundrum boils down to matters of faith eventually. When debt mutualisation is dismissed in Berlin, the impression formed is that this is a position forged in both politics and morals.

There is support for such thinking in The Hague, Helsinki and Vienna. In Paris, Rome and other capitals, the argument goes that this is a blinkered outlook which utterly fails to grasp the true dimension of the problem.

Trust seems to be absent. Germans look askance at the reduction in the French pension age by newly installed president François Hollande. Old-style economic stimulus is simply regarded as a chimera. Spain’s misguided reluctance to confront its banking losses is held in open contempt. National bank stress tests are now seen as an exercise in feeble-minded folly.

The basic German argument is this: other countries are happy to embrace “more Europe” but only insofar as it delivers common liabilities; reluctance inevitably sets in when attention turns to the transfer of sovereignty over fiscal matters to the European forum from the national one.

In German eyes, this is the precondition for any progress towards new crisis-fighting measures. This is the fiscal union part of the story, tougher fiscal discipline and central oversight which may yet go beyond the provisions of the fiscal treaty. The thinking goes that this is necessary to ensure the credibility of all countries, for Germany cannot prop up everyone else on its own.

Attention is already turning to yet another revision of the European treaties, complex legally and immensely difficult politically at a moment of acute financial crisis.

For Hollande, this is highly tricky. He remains wedded to national supremacy in the budget realm and he is deeply sceptical about the treaty, which he wants to amend with new measures to promote economic growth.

The new French leader and his allies still see the final answer to the crisis in new money-printing powers for the European Central Bank and jointly issued eurobonds. No, say the Germans. They say this is all wrong, not feasible legally and even more dangerous politically if the slowdown of the German economy continues. Don’t expect any change on that front any time soon.

Still, there are grounds to detect the beginnings of tentative consensus on the banking front. That this has more to do with fear of bank runs than a meeting of minds on some of the knottiest questions facing Europe need not detain us here. This flows from the uncertain outlook for Greece, where banks have lost billions of euros in deposits, and major capital flight from Spain’s financial system.

In question first is the extent of any pan-European deposit guarantee scheme and the scale and scope of any resolution fund.

Then there is the push on the French-led side of the argument for a centrally run scheme drawing from the European Stability Mechanism to directly recapitalise banks. The money would not go onto national debt and the ESM would be given a banking licence and powers to borrow from the ECB to ensure it had enough money to do the job effectively.

Much of this, however, is anathema to Germany. It was only seven days ago that it spurned Spain’s campaign for direct bank aid.

The Spanish deal was a setback to Irish hopes. However, the failure to restore confidence in Spanish debt might yet force a rethink if a fully fledged rescue is to be averted. This assumes some flexibility on the part of Germany, which is not yet evident.

Berlin is willing to see European banks pay mandatory levies into national resolution funds but not to deploy those funds for cross- border rescues. There is vague talk of special rules for “systemically important banks” but no sign of any concession on the principle of bank debt mutualisation.

Moves are in train towards pan-European banking regulation, with the most important oversight functions moving away definitively from national regulators. The big question now is whether the new London-based European Banking Authority finds its powers intensified or whether it is subsumed into the ECB in Frankfurt. The hunch is that Germany would prefer the latter option. Britain would not.

Towering like a colossus over all of this is Greece. In the cabinet rooms of other countries, there are senior government ministers who would readily pull the plug on Athens. But other figures warn of the potential for chaos in the country – and beyond – if it jettisons the euro.

Whether Greece keeps the currency will probably depend on three questions. First, will anti-bailout parties be able to form a government? Second, will Europe cut off rescue loans if such a government repudiates the EU-International Monetary Fund deal? Third, is there any margin to negotiate a small measure of flexibility in the deal to give a new government something of a fresh start?

There may be little enthusiasm in Europe for the latter option, but that may be the only way of keeping Greece in the euro.

No one wants to contemplate the worst in the event of an outright rejection of the rescue deal, but it may yet come about.

Patience with the Greeks has run out. For their country and for Europe, the vote tomorrow could be seismic.

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