I guess it was just a matter of time before the mainstream media and their economist’s discovered what I’ve been indicating for the last four, five months: The European crisis has transformed itself from an economic crisis to a political crisis.
“You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up.”
Wolfgang Münchau
“They cannot even organise a private meeting. How, then, can they solve a debt crisis? The bungling of a not-so-secret gathering of finance ministers in Luxembourg on Friday night provides an object lesson in how the politics of euro zone crisis resolution is going wrong,” Mr. Münchau writes in today’s column in Financial Times.
The drama starting on Friday evening rapidly turned into another political farce, as pointed out by this blogger the same night.
In today’s column in Financial Times Deutschland, Wolfgang Münchau, makes a summary of what we have learned from Friday’s leak to the Spiegel Online:
The German news site’s story said Greece was considering leaving the euro zone, and that finance ministers were holding a secret meeting to discuss the issue.
The story also offered the intriguing detail that Wolfgang Schäuble, the German finance minister, had a report in his briefcase warning him of the prohibitive costs of a Greek exit.
Earlier that Friday evening, the spokesman for Jean-Claude Juncker, the prime minister of Luxembourg who also has responsibility for finance, flatly denied that the meeting was taking place at all.
That statement was obviously untrue.
The meeting ended on Friday night with the announcement that there was no discussion on a Greek exit or a Greek restructuring. I very much doubt that this statement – or indeed any official statement on the euro zone crisis – was true either.
It is my understanding that this meeting, and numerous others preceding it, discussed the whole gamut of options, including, of course, a restructuring of Greek debt.
But the fact that options are being discussed does not mean they are being pursued.
I am fairly sure that Greece is not preparing to leave the euro zone, and that the European Union rejects an involuntary debt restructuring– for now that is.
The reason for the frantic diplomatic activity is that the euro zone is running out of easy options for dealing with Greek debt.
There are valid objections to every proposal. An exit is too risky. A haircut – a loss for creditors on the outstanding principal – would kill the country’s banking system and land the European Central Bank with losses approaching €100bn.
A voluntary restructuring would not do enough to reduce the net present value of Athens’ debt to a sustainable level.
I understand collateralised lending – swapping old Greek bonds into new collateralised debt at a discount – has also been discussed.
This would subordinate every Greek bondholder, including of course the ECB.
The option to swap bonds of the European financial stability facility, the rescue umbrella, into peripheral bonds has been explicitly rejected by Berlin.
This would probably have been the cheapest option but Germany wanted to nip in the bud anything that smells of a euro zone bond.
The core issue in the euro zone crisis is not the overall size of the peripheral countries’ sovereign debt. This is tiny relative to the monetary union’s gross domestic product.
The area’s total debt-to-GDP ratio is lower than that of the UK, US or Japan.
From a macroeconomic point of view, this is a storm in a teacup.
The problem is that the euro zone is politically incapable of handling a crisis that is now contagious and has the potential to cause huge collateral damage.The “grand bargain” – a series of institutional agreements on euro zone sovereign debt by the European Council in March – did not address the resolution of the current crisis.
That process is starting only now.
Those responsible have realised that, no matter which debt management option they choose, it will cost taxpayers hundreds of billions.
It is highly unlikely states will accept fiscal transfers of such a size without imposing extreme conditions on one another.
The political reason this crisis goes from bad to worse is an unresolved collective action problem.
Both sides are at fault.
The tight-fisted, economically illiterate northern parliamentarian is as much to blame as the southern prime minister who cares only about his own backyard.
The Greek government played it relatively straight but Portugal’s crisis management has been, and remains, appalling.
José Sócrates, prime minister, has chosen to delay applying for a financial rescue package until the last minute.
His announcement last week was a tragi-comic highlight of the crisis. With the country on the brink of financial extinction, he gloated on national television that he had secured a better deal than Ireland and Greece.
In addition, he claimed the agreement would not cause much pain.
When the details emerged a few days later, we could see that none of this was true.
The package contains savage spending cuts, freezes in public sector wages and pensions, tax rises and a forecast of two years’ deep recession.
You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up.
Europe’s political elites are afraid to tell a truth that economic historians have known forever: that a monetary union without a political union is simply not viable.
This is not a debt crisis. This is a political crisis.
The euro zone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back.We know Mr Schäuble has contemplated, and rejected, the latter.
We also know that he prefers the former.
It is time to say so.
By Wolfgang Münchau
Related by the Econotwist’s:
- Are We Facing A Political Crisis, Too?
- EU Leaders At Non-Excisting Meeting To Discuss A Total Fantasy Which They Know Nothing About
- Greece Consider Leaving Euro Zone, Reintroduce Own Currency
- Greece: Just Do It!
- Time To Get Serious About A Real European Union?
- Why The Monetary Union Is A Failure
- EU Can’t Even Agree On Date For Top Leader Summit
- Anger And Mystery Evolve Around French-German Economic Pact
- Europeans Are Too Depressed To Be Innovative
- EU’s New Watchdogs Warns of Crisis Being Far From Over
- Europe: A Lehman Collapse in Slow Motion, Former Lehman Banker Says
Related articles:
- Greece bailout fails to halt debt woes (guardian.co.uk)
- EU under pressure to revise Irish and Greek bailouts (business.financialpost.com)
- Greece Confirms Participation In Luxembourg Meeting (forexlive.com)
- “it is in a pretty catastrophic situation,” (thepressnet.com)
The Masters of Lies
The Austrian daily newspaper, Der Standard, describe the eurogroup chief, Jean-Claude Juncker a “master of lies”, in the aftermath of this weekends not-so-secret meeting between the top EU leaders. The newspaper also see Juncker’s handling of the whole farce as “a fatal error that multiplies the scepticism of the citizens.”
“Juncker and his Round Table should be reminded that it was the small states in May 2010 that made the rescue package for Greece possible in the end.”
Der Standard
EU leaders, with Jean-Claude Juncker in the middle at the back.
Criticism is now mounting against eurogroup chief Jean-Claude Juncker for lying about a secret meeting last Friday of selected EU finance ministers in his native country Luxembourg to discuss the worsening Greek debt situation.
A series of furious attacks on the chair of the group of EU states that use the single currency have appeared in the European press over the last 48 hours, arguing that Mr. Juncker can no longer be trusted.
Ministers and their spokespeople across the euro zone had first denied, or refused to comment, on a report which appeared in Spiegel Online revealing that a secret meeting of senior EU officials was being held in a Luxembourg castle to consider a Greek exit from the euro.
The same officials later confirmed that the meeting took place, but that Greece returning to the drachma was never on the table.
Juncker had apparently invited finance ministers from France, Germany, Spain, and Italy, ostensibly under the aegis of the EU members of the G20 (although the UK, a G20 member, was absent), along with Greece, the European Central Bank and Olli Rehn, the EU economy commissioner.
Juncker’s spokesman, Guy Schuller, was quoted by Reuters as saying:
This absurd event comes just a week after the Luxembourgh prime minister admitted the that over the course of his career, despite his Catholic upbringing, he often “had to lie” in order not to feed rumours and that economic policy was too important to be discussed in public. “I am for secret, dark debates,” he quipped, according to an EUobserver report.
German press agency DAPD quoted him as saying:
“When the going gets tough, you have to lie.”
On Monday, Austrian daily newspaper, Der Standard, attacked the Luxembourg prime minister calling him a “master of lies,” also complaining that Juncker had invited the larger EU states but not the likes of Austria or Finland and describined the move as “a fatal error that multiplies the scepticism of the citizens.”
“Juncker and his Round Table should be reminded that it was the small states in May 2010 that made the rescue package for Greece possible in the end,” the paper writes in an editorial.
Germany’s Suddeutsche Zeitung states that no one can believe what the EU leaders, particularly Juncker, says any more regarding the stability of the euro zone .
“Seldom have we seen politicians acting as irresponsibly as they did on Friday evening. In Berlin, Brussels, Paris, Rome and Luxembourg, officials were silent, deceptive or just plain lied,” the paper thundered.
“Who in the future is supposed to believe that Greece isn’t interested in leaving the euro zone if Luxembourg Prime Minister Jean-Claude Juncker, who heads the Euro Group, is taking the lead on the deception?” the German paper writes.
A frustrated European diplomat told EUobserver the handling of the meeting was “amateur.”
Adding: “What happened is silly. How is anyone going to trust what we say now?”
Meanwhile, Greek authorities are going after Spiegel Online for reporting “false news” about Greece considering withdrawal from the euro.
The Greek prosecutor has contacted German counterparts, requesting assistance in tracking down those responsible at Spiegel Online for the initial report.
On Wednesday, European Commission President Jose Manuel Barroso is to visit German Chancellor Angela Merkel to discuss the Greek conundrum and EU Council President Herman van Rompuy will also be dropping in on the German leader to consider the next steps in the crisis.
This meetings will not take place in secret in a Luxembourg castle, but in Berlin – and will be official – at least that’s what they say…
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