EU and Euro Teetering on Precipice

No Eurozone Bonds for Merkel

Angela Merkel may be the answer to the continentals just as Margaret Thatcher was to the UK in the '80s. Notice from the long and relatively sane article in the Guardian how much Angela resembles Attila the Hen in the strong character and unbending orthodoxy both females maintain in spite of the clucking of the EU barnyard around them:

Only 12 years after it was launched to great fanfare and after early success, the euro is fighting for its short life. Two of the 16 countries using the currency have had to be bailed out, despite the ban on such rescues in 1992's Maastricht treaty that created Europe's monetary union.

Following the traumas of Greece and Ireland, Portugal may be next in line. There are worries about Spain.

In Brussels tomorrow the leaders of 27 countries, as well as the heads of the European commission and the European Central Bank, gather for their seventh EU summit this year, all consumed by the crisis surrounding the single currency.

The air of rancour and pessimism is pervasive. Bitterness is widespread, particularly among the smaller EU countries and those who feel they are being bullied by the most powerful.

"There is no appetite anywhere for another Franco-German plan to save the euro," said an east European government minister.

Taking fright

Jean Asselborn, the foreign minister of Luxembourg, went further: "I can only warn Germany and France against a claim to power that shows a certain overbearingness and arrogance."

A prime minister of a small EU state was more damning still. "Merkel and Sarkozy think they are the most pro-European leaders ever. But there is no Franco-German leadership. It's all domestic politics," he told the Guardian.

The widespread unhappiness, particularly with Germany and the nostalgia there for the rosy days of the D-mark, highlight the tensions gripping Europe as a result of the euro's year of agony.

The crisis – a delayed impact from the banking and financial collapse of 2008 – crept up and took EU leaders unawares, starting in the Greek government's confession late last year that its predecessor had been cooking the books for years and that its public debt and budget deficit were careering out of control.

The bond markets took fright, pushing up the risk premiums on Greek borrowing to exorbitant levels and triggering a spiral of panic and brinkmanship that engulfed Ireland and Portugal and exposed the flimsy foundations of the common currency.

The year opened as it ends, with a Brussels summit characterised by misunderstanding and fundamental differences over what to do. "It's hard to see in policy terms what is the way forward," said a senior diplomat in Brussels.

In February, EU leaders promised to do whatever it would take to help Greece and protect the euro. The markets attacked harder and called their bluff. In March, for the first time, Angela Merkel, the German chancellor, dictated the stiff terms that would have to be met for Berlin to accede to a Greek bailout.

The German backlash was severe, with the media denouncing Greek spongers and feckless southern Europeans while attacking Merkel for betraying the principles supposed to underpin the euro. In May the EU and the IMF bailed out Greece to the tune of €110bn and announced a €750bn shield to protect the euro against a cascade of sovereign insolvencies around the Mediterranean.

Rotten banks

That brought a respite, but only for a while. By last month Ireland, riddled with rotten banks and crony capitalism, was the first country to tap the emergency fund for €85bn (£72.5bn).

"Was it for this?" asked the Irish Times plaintively, evoking the poetry of WB Yeats from 1913 to grieve over the surrender of Irish sovereignty to a bunch of IMF and ECB accountants.

Tomorrow's summit caps a year of unprecedented trouble, with the leaders expected to agree on a new permanent European stability mechanism replacing May's ad hoc emergency fund from 2013. But the EU's leaders are gambling, crossing their fingers and praying for good fortune. No one knows if the gamble will pay off.

The script for the summit has been written in Berlin, indicating how the crisis has thrust Germany to the fore in Europe in a way unparalleled since the country was reunified 20 years ago. For many other Europeans, this experience has been chastening.

"It has always been very difficult to take decisions in the EU against German thinking. But that's not new," said the prime minister. "The new phenomenon is that the Germans are talking, but they're not listening. For the first time on a serious issue, I'm upset by the German behaviour."

However, the spineless drones surrounding Merkel representing powerhouses like Luxembourg and Spain and the ever fickle France whine continuously in a gossipy tone about Ms. Merkel's policies. You can bet that if she or another German Kanzler had come up with other policies that wimps like Trichet and arrogant nobodies like Juncker, the bozo who showed during the Bosnian crisis Dick Holbrooke solved what an empty drum the EU is in any international crisis---these nobodies and wusses would be whining anyway. That's what tiny mentalities do when faced with real power and strength of character:

Jean-Claude Trichet, president of the ECB, José Manuel Barroso, president of the EC, and Jean-Claude Juncker, chairman of the Eurogroup countries and prime minister of Luxembourg, have all separately attacked Merkel in recent months, calling her "naive" and "simple". In the WikiLeaks cables, the US ambassador in Berlin characterised the chancellor as "risk-averse and seldom creative".

In a paper in July, Jean Pisani-Ferry, director of the Bruegel thinktank in Brussels, noted: "In Angela Merkel, the EU has a de facto leader, but one who was not prepared for leadership."

But there is no doubt Merkel is calling the shots, however ambivalently. The main business of the summit is to try to shore up the euro by changing the Lisbon Treaty to establish the stability mechanism. Only Berlin, for domestic political reasons, wanted the treaty changed. The draft formula already agreed for the summit says the 16 eurozone countries may establish the mechanism, but that its use will be tied to strict conditions and only in the event of a systemic threat to the euro.

For Berlin, that is not enough. "The issue of last resort could be strengthened," said a senior German government source, signalling there could yet be a row. The German insistence on "ultima ratio" or last resort means that the new permanent bailout fund can only be tapped when all other options have been exhausted.

For the critics of Berlin's hard line, that means nothing can be done to save the euro except on German terms and only when it may be too late. "For domestic political reasons, the Germans will only act in an absolute crisis," bemoaned another EU diplomat.

By sticking to last resort remedies, the critics continue, the EU is forever on the back foot, reacting to and never pre-empting the pressure of the financial markets. The other big criticism of the emergency plan is that the cure may be worse than the disease. Any country requiring a bailout is forced into a programme of cuts so extreme that economic growth becomes impossible and the high indebtedness remains.

A highly developed economy with large exports and a sane fiscal mentality cannot coexist with statist monstrosities like Greece which have one-third of their employment in the public sector burdened with gigantic pension and other obligations. There is no part of the Greek economy save tourism that can generate income in the foreseeable future. And the Greeks rival the French in lack of hospitality skills, so tourism isn't likely to dig them out of their deep hole.

"I can't see the light at the end of the tunnel for Greece. You can't make Greece competitive," a senior EC official said. "Where is growth supposed to come from in these peripheral countries when you have extreme deflation imposed on them, essentially by Germany. It's a policy cul de sac."

Despite the seething resentment of her policies, Merkel remains "extraordinarily powerful", according to the senior diplomat, not least because she has the fattest chequebook. Of the €580bn pledged in bailout funds by Europe since May, Berlin is liable for €162bn.

Merkel has also been consistent since the beginning of the crisis. As early as March, she laid out the terms that are on the agenda – including treaty change and "last resort" help only. She clashed with France and Sarkozy in May, but a turning point came in Normandy in October when, at a summit with the French leader, Merkel's message was apparently "my way or the highway". Since then, the French have not challenged Merkel although they oppose the "last resort" condition for bailouts.

"The French have decided that the best way of influencing the eurozone is through the closest possible relationship with the Germans," said the senior diplomat. "There is a German prescription out there. It's to turn the eurozone into a big Germany. The Germans think everyone should run their economies like the Germans do."

The smartest thing the UK ever did was reject the invitation to tie themselves to the various rotting corpses comprising the Eurozone. Even with a healthy Germany and a sustaining France & Netherlands and Denmark, the rest of Europe is a second-world swamp of economies trying to become first-world, like Ireland and the Czech Republic. Or third-world malarial miasmas of failed-state nanny economics like Greece, Portugal, Spain, and Italy. With a few peripherals waiting for entry like Estonia and Poland. In the meantime, the Eurozone is on life support as its constituent members wrangle.

It is far from clear that the Berlin formula will work. Things could still get messy despite months of endless emergency meetings.

"What we don't need is a beauty contest between leaders, a cacophony of diverging scenarios, or announcements that are not followed by action," Barroso warnedtoday.

But the euro's horrible year is not deterring everyone. Estonia becomes the 17th country to join the currency union next month. The Poles say they still want to join, but are hedging their bets. "We have to wait and see if the euro plan will work," said Mikołaj Dowgielewicz, the Europe minister.

And its defenders argue that despite the crisis, Europe would have been in much bigger trouble in the financial crash of the past two years without the euro. The D-mark would have soared in value, wrecking German exports, while protectionism and competitive devaluations elsewhere would have shredded the EU's single market.

My guess is that Merkel will muddle through until the light at the end of the tunnel is discerned to be daylight or a train coming in the Euro's direction. Then it will be tight-sphincter time for the EU.