Euro-zone officials are working to magnify the magnitude of the region’s rescue fund, the European Financial Stability Facility (EFSF), to set aside 440 billion euro in assets that could be used as collateral to borrow from the European Central Bank (ECB), making more money available to stop the crisis from spreading.
Europe has not fully healed from the 2007 financial crisis nor has it fully addressed issues in its banking system, which all have been compounded by the Greek debt crisis. The EFSF, which has yet to be fully ratified, was initially used as a TARP (Troubled Asset Relief Package) to buy assets, then used to recapitalize banks and it was used to pay TALF (Term Asset-Backed Securities Loan Facility). Now, the finance ministers within the Council are negotiating how to leverage the money out of the EFSF in a more innovative and efficient way, to shield bigger economies such as Italy and Spain. The EFSF is due to expire in mid 2013, to be replaced by the European Stability Mechanism (ESM), a permanent crisis resolution mechanism, to mobilize funding and provide financial assistance, under strict conditionality, to Euro-area Member States.
German Chancellor Merkel and her conservative coalition has urged the EU to implement the ESM a year earlier, in order to solidify a more resolute mechanism for the debt crisis; rather than continuing intergovernmental funding of relief packages, which have been funded by Germany, for the most part. The ESM will use an appropriate funding strategy so as to ensure access to broad funding sources and enable it to extend financial assistance packages to Member States under all market conditions.
“What we can’t do is destroy the confidence of all investors mid-course and get a situation where they say that if we’ve done it for Greece, we will also do it for Spain, for Belgium, or any other country. Then not a single person would put their money in Europe anymore.” – Angela Merkel, Chancellor of Germany
Despite the focus on the fiscal crisis in Germany and Italy, the EU has also come to face growing political instability within its Member States, which can delay or even scrap support for relief packages, creating a conundrum of crises. Belgium, home to the headquarters of the EU, has been left without an official government for close to 500 days, due to the intractable divisions between Belgium’s Dutch and French-speaking camps. Moreover, last week Tuesday, the left-leaning government of Slovakia was usurped by a vote of confidence and is now also under the supervision of a caretaker regime.
Furthermore, Europe’s three largest countries have experienced internal dissent, from Euroskeptic related groups, because of their high stakes in the EU. Firstly, France is nearing elections and President Sarkozy has been verbally attacked by opposition and coalition partners, because of his call for French investment in Greece. Secondly, Britain’s Prime Minister Cameron has been targeted by Tory PMs, calling for a referendum concerning Britain’s ties to the EU. Lastly, Merkel’s leading Christian Democrat party has faced growing opposition to her handling of the debt crisis from her coalition partners – the Christian Social Union (CSU) and the economically liberal Free Democrats (FDP).
“Our European neighbors can rest assured that there are two decidedly pro-European opposition parties who distinguish themselves from the increasingly anti-European CSU and FDP, which is also on the way to becoming Euroskeptics.” – Juergen Trittin, leading Green politician
The Greens have grown from being junior partners in Gerhard Schroeder’s SPD-led government from 1985-2005 and the smallest group in parliament in the 2009 elections, to becoming a force to be reckoned with in regional and national politics. Polls suggest the Green party would win about 20% if national elections were held now. This would put them as the 3rd largest, behind the conservatives and the SPD, with enough for a winning “Red-Green” coalition. According to Trittin, the Greens are more in line with the rest of the European Union on proposals such as common Euro-zone bonds than Merkel. The Greens had proposed a tax on financial transaction long before Merkel pushed for it and they urged her in August to bring forward the permanent successor to the EFSF, the ESM, instead of waiting until 2013, which she has just now announced as another proposal for the EU’s consideration.
“In the middle of a huge crisis, if the biggest state in the Euro-zone has a minority government which relied on the goodwill of opposition parties, it is no longer in condition to lead through the crisis.” – Juergen Trittin, leading Green politician
Private economists and Brussels think-tanks expect a Greek debt default within months or sooner, despite a capital injection for European banks and leveraging up of the EFSF. Nevertheless, planning continues on the basis that Greece’s debt burden, which is close to 160% of GDP, can be sustained as long as the government fully implements austerity measures demanded by the European Commission, the European Central Bank and the Internal Monetary Fund. So saying, bus and metro workers are planning to strike and tax collectors themselves plan on beginning a 48-hour stoppage in protests against the bill to approve an unpopular property tax. The IMF and EU both have criticized Athens’ failure to reduce the size of its bloated public sector because it has made little progress on a pledge to cut the 730,000 public workforce by a 1/5, eliminate dozens of inefficient state entities and sell off loss-making state firms. The Athens’ government has failed to end rampant tax evasion, while the 3rd year of economic contraction has undermined budget revenues and put Greece off-track for its goal of cutting the budget deficit to 7.6% of annual output this year. Although unhappy with imposing yet more austerity cuts on voters hit by tax hikes and spending cuts over the past 18 months, the Socialist party lawmakers are expected to toe the line to prevent a Greek default that would shake global markets and possibly engulf other debt-laden Euro-zone states.
“These are very critical days and weeks ahead, reminiscent very much of the touch-and-go situation we were back in 2008. The key difference this time around is that countries and not companies that are in danger of going bust.” – Edward Meir, Senior commodities analyst at brokers MF Global
In retrospect, bank shares rallied on hopes of Euro-zone debt deal. French and German bank shares were up at 10% at one stage in Monday. So saying, the EU is faced with political and fiscal uncertainty in which conflicting media reports have played games with the stock market, with chronic selling and investing throughout the week. Under these circumstances, transparency has added to the problems of the EU and will make every move and policy more consequential for the future of the EU.