Total German triumph as EU minnows subjugated The Iron Chancellor of Germany could not have been clearer. “Whoever wants credit must fulfill our conditions“.
Repost Telegraph 2011 ..Good summary of an ass chewing.
These conditions are capitulation by three vulnerable states on core policies, and partial loss of sovereignty for the rest of the eurozone.
For Greece, the terms are a fire-sale of €50bn (£43.2bn) of national assets within four years, a tenfold increase from the original €5bn that premier George Papandreou thought he signed up to a year ago.
When the IMF first mooted this sum last month he told the inspectors not to “meddle in the internal matters of the country.“
State holdings in Hellenic Post, Hellenic Railways, Athens Public Gas, the Pireaus port authority, Athens airport, Thessaloniki water, and ATEbank, to name a few, will not fetch more €15bn. What next?
In return, Chancellor Angela Merkel has agreed to cut the penal interest rate on the EU share of Greece’s €110bn loan package by 100 basis points (still penal), and stretch the maturity to 7.5 years.
EU leaders reach deal on debt crisis 12 Mar 2011
Spain downgrade sparks storm over ratings 10 Mar 2011
EU paralysis drives fresh bond rout 09 Mar 2011
Flat-Earth ECB misreads oil spike again, and kicks Spain in the teeth 07 Mar 2011
German-Irish brinkmanship raises EMU stakes 02 Mar 2011
Greek debt price soars as Moody’s cuts rating 07 Mar 2011
This does not restore solvency. Greece’s debt spiral is too far advanced. The debt load will approach 150pc of GDP this year, and debt service costs are 14.4pc of tax revenue.
Meanwhile, austerity is biting harder. The jobless number jumped almost a full point to 14.8pc in January. Youth unemployment hit 39pc.
For Portugal, the condition is more hairshirt retrenchment, a fiscal squeeze of 5.3pc in one year. Pensions, welfare, and health will be cut, following wage cuts already under way. “A descent into Hell,” said the Bloco de Ezquerda.
Almost 300,000 youth took to the streets of Lisbon and Oporto on Saturday in a day of wrath by the “Desperate Generation”, openly invoking the events of Egypt’s Tahrir Square.
A wing from the ruling Socialist Party said it would not vote for a “disastrous policy”. They said the cabinet did not even know about the cuts imposed by Brussels before Wednesday night.
Fiscal tightening of this magnitude in a country with public-private debt of 330pc of GDP, an over-valued currency, and reliance on fickle foreign financing, is not a happy prospect.
“This is likely to have meaningful implications for the stability of the domestic banking system,” said Giada Giani from Citigroup. Yields on Portugal’s 5-year bonds hit a record 8pc on the news of cuts. The bond markets view further belt-tightening as self-defeating.
For Ireland, one condition – as yet unmet – is to give up the 12.5pc corporate tax rate described by France’s leader Nicolas Sarkozy as “shameful”.
Angela Merkel was more clinically imperious: “We weren’t satisfied with what Ireland agreed to, so the question of lowering interest rates has only been addressed for Greece.” What a debut for the new Taoiseach, Enda Kenny.
This tax has been the foundation of Ireland’s economic strategy, a reason why it has been able to build a pharmaceutical, medical, and software industry so far from Europe’s geographic core.
Peter Sutherland, former EU competition tsar, said Ireland is being punished for transparency. The real corporate tax rate in France is 8.2pc when hidden incentives are included. He called the EU rescue deal a Diktat, with “exorbitant“ interest of 5.8pc. Such a rate is suffocating for an economy in the grip of core deflation, already reeling from a 22pc contraction in nominal GNP.
The condition for Spain, Italy, Belgium et al, is intrusive surveillance of pensions, wage policies, productivity levels, as well as demands for a mandatory “debt-brake”, regardless of whether or not such a reactionary policy implies 1930s deflation.
Just as eurosceptics always feared, monetary union has led to a state of affairs where – in order to “save the euro” as Mrs Merkel puts it -Europe’s ancient states find themselves having to accept a quantum leap towards political union and a degree of subjugation that would not have been tolerated otherwise.
There is no democratic machinery to hold this central system to account since the European Parliament lacks a unifying language or demos, and remains a technical body in practical terms.
Raw power is shifting, but to whom exactly? It is as if Merkel has somehow been crowned Magna Mater Europae by the Consilium, behind closed doors.
In exchange for these conditions, Gemany has agreed to boost the deployable lending power of the rescue machinery (EFSF, soon to be ESM) from €250bn to €500bn. It is not clear how this can be squared with the fund’s AAA rating, though the looming threat of EU rules to make Moody’s, Fitch, and S&P liable for “incorrect ratings“ may secure some flexibility.
She has agreed to let the fund buy bonds of rescued states “as an exception“, and not on the secondary market. The language is odd, and EU summits have a habit of issuing communiques that mean different things to different countries and unravel under scrutiny
She has not agreed to eurobonds or a “soft-restructuring“, where debtors buy back their own bonds at a discount on the market, to chip way away at the debt burden. Yet unless this is done, the laggards will struggle to pull out of debt deflation.
She has not agreed to the purchase of bonds of crippled debtors pre-emptively to cap yields and nip crises in the bud, and has certainly not agreed to pay one cent in extra transfers to southern Europe or Ireland.
Mrs Merkel professed to be “very pleased“ with the outcome. “We’ve accomplished out national goals,“ she said.
Indeed. The deal does not take Germany across the Rubicon into a ‘Transferunion’. It ushers in economic intergration on Teutonic terms, but without the prize of shared debt liability. Germany gets most of what it wants, and avoids most of what it does not want.
She can return to the Bundestag and plausibly reassure the three blocs of her coalition that she has not violated their instructions, or signed off on concessions that manifestly violate Maastricht or the German constition.
Yet is this the “grand bargain“ that will resolve the crisis once and for all?
The tenor is cruelly one-sided, as if this were a morality tale of wise and foolish sovereign virgins. The debtor states are made to carry opprobrium for what is at root a pan-European banking crisis.
Ireland and Spain never breached the deficit ceiling of the Stability Pact, though Germany and France did. They did not break the rules. If anything, it was the European Central Bank that broke the rules by running negative real interest rates and gunning the money supply.
Europe’s whole financial system was out of control, and still is. The North has not yet forced banks to rebuild their capital buffers or nationalize those that cannot do so, understandably in one sense since it might risk a credit crunch. Germany’s policy towards the Landesbanken is a study in paralysis.
That is why Europe dares not lance the boil with “haircuts” and debt restructuring. It dares not risk a repeat of Europe’s Lehman moment in May 2010. It is why the EU has scotched any quick move by Ireland to deflect the shards of pain from taxpayers to senior bank creditors.
How long will democracies accept being made the scapegoat for what is in part a Franco-German-Benelux banking debacle?
Not for ever, judging by comments this week by Avriani, a paper with ties to Greece’s ruling PASOK party. “We should default and return to the Drachma to punish foreign loan sharks who have bled us dry,” it said.
Ireland’s Enda Kenny may ultimately have to choose between his EU club loyalties and his duties to the sovereign nation that elected him. Some within his coalition ranks already seem tempted to retaliate by pulling the plug on EU banks. That would certainly remind Chancellor Merkel and President Sarkozy what this crisis is really about.
Popular revolt is the dog that has not barked since the long slump began. This may just be a question of time. The pattern of the 1930s is that deep alienation starts in year three as austerity grinds on, and in this case tensions on the eurozone peripery can only turn nastier as the ECB tightens monetary policy.
What is clear is that sovereign states are being forced to cut wages and dismantle parts of their welfare state under foreign diktat, with a gun held to their heads. This will not be forgotten lightly. The character of the European Project has changed utterly.