As Greece emerged from yet another round of violent protests in response to more austerity cuts, plans to tackle the growing EU debt crisis has stalled with France and Germany at odds over the European Financial Stability Facility (EFSF).
The news from the European continent has ceased to surprise onlookers as officials hold ceaseless meetings and pretend deals, flying here and there with no evident signs of progress. In Greece, a general strike called by two of Greece’s main unions has led to a near nation-wide shutdown as protests have degenerated into violence. Much of the country was shutdown by the 48-hour general strike, the largest since the outbreak of the crisis, with over 100,00 people taking to the streets in Athens. The groups of hooded youths clashing with police on side streets has overshadowed the start of the 48-hour strike, as well as illustrated the aggression of demonstrators following the appeal for support by Prime Minister George Papandereou just moments before the parliamentary vote on the latest measures for tax rises, wage cuts and pubic sector layoffs. Trapped in the third year of a deep recession and strangled by a public debt amounting to 162% of GDP, Greece has sunk ever deeper into crisis. Moreover, the Prime Minister has only a narrow 4-seat majority, which is expected to ensure the austerity bill goes through, but his ruling Socialist party’s discipline is increasingly strained with multiple deputies resigning in protest and others voting in opposition of future measures. With evident political instability and unsettling votes of confidence elsewhere in the EU, the predicament in Greece makes it obvious that society has reached the limits of what it can bear.
“It’s one of the bigger demonstration in recent years. People showed they were determined to protest against these policies. We are not through with these protest. We’ve reached a point where people don’t feel that government represents them anymore, they want a complete change.” – Mary Bossis, international security professor at University of Piraeus
Elsewhere in the scramble for security in Europe, Spain has found itself at the cutting stones of the tyranny of credit rating agencies, as Moody cut Spain’s rating from A1 to Aa2, a two notch cut. Moody laid the blame at Spain’s low growth prospects and high levels of debt. Spain, the 4th largest economy in the EU, has an employment rate of 21%, equaling a total of 4.2 million people officially out of work. Spain has stated its objective to cut its deficit to 6% in 2011, from 9% in 2010, but many analysts have warned that this target may be missed. Resembling the past dilemma in Greece, when the government was not able to sufficiently satisfy IMF and EU criteria for another bailout, Spain may soon find itself in similar predicaments of government shutdowns. Last week, both Standard and Poor and Fitch cut the Spanish credit rating to AA-, which will all result in an increase in Spain’s borrowing costs and higher interest rates.
Moreover, the fiscal crises of the EU has truly expressed the supranationalism of the entity, as Greece’s problems have also pressured Italy and Britain, a country that is not even a member of the European Monetary Union (EMU). On the same day of Spain’s downgrade by S&P, the credit rating agency also lowered its rating on 24 Italian banks. Apparently, the busy schedule or rating agencies has transformed into a race between the agencies as Moody followed its Spain downgrade with issued warning to France, stating that it could face the loss of its coveted AAA status. In Britain, David Cameron has come under pressure once again by the Euroskeptics in the Conservative party, calling for a referendum on Britain’s future in the EU. The pressure has escalated since the last attempt by Tory MPs in September. As mentioned in EU: The European Stability Mechanism and Growing Political Instability, the governments invested in the EU have faced growing resentment from their fellows, as well as providing grounds for the reproachment between opposition parties and potential voters. Next Thursday’s vote on an in/out referendum was ordered by the backbench business committee after a petition with more than 100,000 signatories was received. A vote in favor of a referendum would be not be binding for Cameron, as seen in his past rejection of such calls, but such support and publicity will put huge pressure on the Prime Minister to promise one at a later date. The motion calls for the country to be given a 3-war choice between remaining in the EU, leaving or negotiating terms of a looser relationship based solely on free market terms and cooperation.
“If the House of Commons passes this motion, any government would be hard-pressed to ignore the democratic will of the British people. What matters is what is good for the country and good for British businesses.” – David Nuttaly, Conservative Member of Parliament (MP)
Over the weekend, a meeting of the finance ministers from the world’s largest economies, aimed to keep the banks capitalized so that they could weather the effects of any potential defaults. Nevertheless, there appears to be a split between France and Germany on how to do this. In order to recapitalize banks, Germany suggest that individual European states should inject capital into domestic banks that lack sufficient buffers. France is opposed to this idea because trying to fund its own failing fiscal system would jeopardize the nation’s AAA status. The division was illustrated by a statement by Germany’s finance minister, Wolfgang Shauble, that suggested resolution talks would likely go beyond the self-imposed deadline set for this weekend. Rather, a final package would not be in place until the G20 summit in Cannes next month. Shauble has placed a transaction tax on derivatives trading at the center of proposed reforms, along with a series of measures to calm market volatility, discourage excessive borrowing and persuade citizens protesting in European capitals that politicians are aware of their concerns. He also has laid out a 4-point plan that Germany believes will resolve the situation and create sustainable future for Greece and the rest of the ailing Euro-zone nations. The plan involved securing systematically important banks with increased capital, enhancing the EFSF in flexible way that is most efficient, finding a sustainable solution for Greece and establishing better governance for the Euro-zone.
“His strong insistence on bank recapitalization and a restructuring of Greek debt suggest this will not be a painless of quick outcome. More importantly, he is defending the German approach to the debt crisis and is very robust when talking about the failing of financial markets and the need for fresh regulation. As we saw in successive ERM [exchange rate mechanism’ crises 20 years ago, Germans are not afraid to voice their opinions forcefully and back them with action. In my opinion, markets may be underestimating their determination now to impost fresh rules, regulation and policies which will be friendly neither to investors or shareholder.” – Nick Parsons, head of research at National Australia Bank
The blunt of the actions being taken to reform the Euro-zone will fall on individual members, but within the states it will fall on banks invested in the indebted nations. As part of a Franco-German plan to avert disorderly default, Euro-zone finance ministers have signaled they will ask banks to accept losses u to 50% on Greek bond holding. Many Euro-zone officials have even gone so far suggest that a write-down of 605 for Greece’s private creditors is under consideration, almost 3 times that agreed in July when EU leaders approved a second bailout for the indebted nations. In particular, Belgium has come under pressure in recent weeks following concerns that it will need to spend billions of Euros rescuing its banks despite already pumping 5 billion Euros into Franco-Belgian group, Dexia.
Nonetheless, the EU has combated the growing sentiment of disparity with the launch of its plan to invest 50 billion Euros in modernizing digital, energy and transport networks, creating hundreds of thousands of jobs over the next few years. The European Commission scheme envisages the use of bonds backed by the European Investment Bank (EIB) to fill the gaps left by cash-strapped government and leverage up private investment. The plans are designed to pay back taxpayers for the aid and guarantees of 4.6 trillion Euros to the financial sector in the past 3 years. 31 billion Euros of the plan goes towards transport links, 9.1 billion goes towards energy grids and 9.1 billion will go towards supporting high-speed digital networks.
In retrospect, the problems facing the EU have come from years of no regulation or supervision over a highly interconnected and interdependent system which led to excess borrowing and expenditures bubble that finally burst. So saying, Germany’s resilience and fiscal and political support throughout the crisis has been unrelenting despite domestic strife, political opposition, and fiscal strain. Nevertheless, the German experience with hyperinflation in the 1920s has brought Germany to the point of fiscal superiority in the EU which has been illustrated in their sponsorship of the Stability and Growth Pact in 1997 for the EU. It is because of Germany’s responsibility that it is evident that any solution for the crisis must be spearheaded by Germany, with future clauses ensuring supervision and escalated regulation measures by an institution that should, by all rights, be grounded in Germany.