Luis de Guindos had one last clandestine mission before unveiling his plan to the public and jittery financial markets. The Spanish finance minister had just won a furious backroom battle to oust Rodrigo Rato, a favourite son of his ruling centre-right Popular party, from the helm of Bankia and nationalised the faltering year-old assemblage of savings banks that had collapsed after betting wrongly on the country’s housing bubble. But the most critical stage of his still-young tenure was facing him on Friday. He needed to convince the world that his government finally had a scheme to shore up its sinking banking sector, which bond traders were betting would force Madrid to seek EU aid, making it the fourth in a rogue’s gallery of eurozone governments to succumb to foreign management. Before he could convince the markets, however, he had to convince the people who ran Europe. First on his list was Olli Rehn, the ruddy-faced EU economic and monetary affairs commissioner. But the increasingly powerful Finn was not in Brussels, having flown off to meet Mario Monti, the Italian prime minister. A compromise was agreed: Mr De Guindos would fly under cover of night to Milan on Wednesday, away from the prying press corps in Madrid and Brussels. Over a late dinner in the Italian financial capital, Mr De Guindos laid out his plan: he would force Spanish banks to raise another €30bn in cash to offset expected losses on their property portfolio, taking total “provisions” to nearly €120bn. The next morning, he flew surreptitiously to Frankfurt, where he made the same presentation to Mario Draghi, the courtly Roman who heads the European Central Bank. The stage was set. Back in Madrid, Mr De Guindos announced his plan, and the financial markets sputtered. Borrowing costs on benchmark 10-year Spanish bonds edged back above 6 per cent, and Spanish stocks continued to fall; the Ibex 35 index is now at levels not seen since 2003. The covert transcontinental journey and Friday’s dramatic announcement capped a week that sent shockwaves through an already unstable eurozone, reviving fears that the crisis leaders believed had been tamed just two months ago was again threatening to rock the global economy. Nicolas Sarkozy, co-author of much of the single currency’s rescue plan, became only the second French president to be ousted after a single term. In Italy, populist comic Beppe Grillo stunned the political establishment by taking more than 10 per cent in some regional elections. The Bundesbank and political leaders in Berlin, amid mounting anti-German sentiment in the eurozone, conceded what was once unthinkable, allowing Europe’s biggest economy to risk inflation in order to pull the rest of the contracting continent back from the brink. Most consequentially, there was the election that could challenge the very existence of the 17-member single currency and the future of the European project: the collapse of Greece’s post-junta political order in Sunday’s national elections – and with it the elite consensus that the land that gave the world democracy would remain at the heart of Europe. France rumbles By law, the exit polls that inform the French public of their next president were not to be released until 8pm on Sunday night, but two hours earlier they began circulating in political and media circles. They showed that François Hollande, once likened to a soft pudding because of a perceived lack of convictions, had eked out a surprisingly slim victory over Mr Sarkozy. Those with Mr Hollande that night said he received word of his win at about 6.30pm. Rather than jubilation, he responded simply: “C’est bien.” Indeed, in contrast to the triumphant crowds in Paris, where revellers waved red roses as they hung from lampposts around the Bastille monument, symbol of the French Revolution, the mood in Mr Hollande’s rural political base of Tulle in central France, was subdued. When a giant screen in the town square finally flashed up the official result at 8pm, it promptly started to pour with rain. “That’s not a good sign,” said an older member of the crowd. The president-elect had reason to be reserved. Alongside intemperate weather and a narrower-than-expected victory, he had just been handed a country that had seen its credit rating downgraded, its standing next to its German partner in Europe questioned and its economy sputtering. Taking the stage in Tulle, he allowed himself the briefest of dances with his partner, Valérie Trierweiler, as an accordion played Edith Piaf’s “La Vie En Rose”. But his message, broadcast to audiences around the world, was stark: the challenges ahead would be “numerous and heavy”. Perhaps his earnestness was an attempt by a man who had never held government office to look presidential. Or perhaps it was because he was aware of the electoral earthquake taking place on the other side of the continent, presenting an immediate challenge to him and the German chancellor he had publicly antagonised during his campaign. Greece crumbles At the previous Greek general election, in 2009, the two parties that have dominated politics since the end of military dictatorship in 1974 – the centre-left Panhellenic Socialist Movement (Pasok) and the centre-right New Democracy – received a combined 77 per cent of the vote. If leaders of Pasok, winner of the last election, had any doubt things would be different this time, they were banished on the Friday before election day at a closing campaign rally in Syntagma Square, central Athens. Three years ago, nearly 100,000 supporters packed the plaza nestling below the Acropolis; this time 3,000 at most turned up. “From that point on, we started bracing for a difficult outcome,” says one aide to Evangelos Venizelos, the burly Pasok leader. The party that would really have something to cheer about on Sunday was Syriza, a radical left grouping that vaulted ahead of Pasok to become the second biggest party in parliament. “They played hardball on the euro, we took a responsible line. They won,” says the aide. The seat of power had suddenly moved to an unlikely address: Koumoundouro Square in a rundown part of Athens where on Wednesday afternoon, vagrants were sheltering from the sun under bushes. Opposite was the headquarters of Synaspismos, the largest party in the Syriza coalition. Inside cramped, smoky offices, campaign officials were scrambling to stay atop the wave they had unleashed. Their boss, Alexis Tsipras, a 37-year-old career politician, was supposed to be negotiating with Pasok and New Democracy, but he had publicly spurned them. Instead he was courting a caretakers’ union, trying to transform his strong showing into a broad-based social movement. One gloating aide referred to “the two ex-big parties” Mr Tsipras had skipped out on. “They’re not big any more.” But not everyone was in celebratory mood. “The country is sinking,” Nikos Sofianos, secretary-general of the Athens chamber of commerce, said between persistent calls on his mobile phone. He said Syriza’s rise would eventually force Athens to quit the euro. Officials in Brussels and Berlin were preparing for a similar outcome, and began contemplating it openly. Contingency plans for a Greek exit that were made last year – when George Papandreou, then prime minister, threatened a referendum on euro membership – were being dusted off. “In a normal country, the political dynamic is those who are more responsible start getting to together and working things out,” said one senior EU official. “Whether that will work in Greece, I can’t tell.” The recriminations in Greece were almost immediate. After a token effort to form a government, Antonis Samaras, the New Democracy chief whose party came in first albeit with a stunningly low 18.9 per cent, returned his mandate to give Mr Tsipras a shot. The Syriza leader enjoyed two days in the spotlight before conceding his own failure to craft a governing majority. Then it was the turn of Mr Venizelos to attempt to form a new government. And there was a flickering hope: the small Democratic Left party, headed by a Pasok defector, signalled a willingness to join Mr Venizelos and New Democracy in a coalition, giving them an additional 19 sets, more than enough for a majority. The odds remained long, however, and new elections seemed likely for mid-June. Berlin scrambles... ©AFP On Monday, following regional elections, Berlin woke up to the traditional morning-after party press conferences. But the question at the top of everyone’s mind was not about Schleswig-Holstein. Overnight the ground had shifted – dramatically. Senior German officials had been prepared for the end of “Merkozy”, the awkward partnership between Chancellor Angela Merkel and the irascible Mr Sarkozy. They had already begun talking to Mr Hollande’s advisers, seeking out terms on which the new French president would accept Ms Merkel’s prized “fiscal compact” of eurozone budget strictures in return for some kind of annexe on growth. But the outcome in Greece caught them by surprise. Publicly, Berlin held the line. Ms Merkel struck her “Iron Chancellor” pose. Most telling to some EU leaders were remarks from Jörg Asmussen, the German member of the ECB board of governors and widely viewed as the most pragmatic and level-headed of the country’s occasionally doctrinaire economic class. “Greece must be clear that there is no alternative to the programme if it wants to remain a member of the eurozone,” he said in an interview with Handelsblatt, the German business newspaper. But behind the scenes, there was a scramble. Standing in the Bundestag, an agitated official from Ms Merkel’s Christian Democratic Union pointed to the chancellery, a stone’s throw away. “They’re trying to do everything to make the Greeks see sense,” said the official. “Publicly, privately, they’re imploring the Greeks to recognise that giving up on the [bailout] programme now would be a sort of Hiroshima for Athens.” The fear was what it has always been: any whiff that Greece was serious about leaving the single currency would lead to a run on its banks, emigration and the risk that depositors in other peripheral countries would think twice about keeping their euros in Portuguese, Spanish and Italian banks. It was a point Berlin was trying to get across to Mr Hollande. “We’re hoping he’ll understand that a Greek exit from the eurozone will also hit France,” the official said. “I mean, it’ll be French banks that get hit, too ... We really hope that message is sinking in.” The concern had become so intense that some who talked to German officials said that, after a June election in Greece, Berlin might be willing to give a credible coalition wiggle room to keep the currency union together. “If you have a different approach, I’m sure ministers would be willing to listen, as well as the IMF,” said one senior official from one of Germany’s eurozone allies. “I wouldn’t say every comma is unchangeable ... but this could be on the outer margins.” ... and finally softens It was not only Ms Merkel’s Greek strategy under siege, however. Having been the champion of an austerity-led recovery plan for the single currency, the Chancellor was suddenly becoming isolated elsewhere. On Tuesday José Manuel Barroso, the European Commission president who had long been bitter about being ignored by Berlin, touted Brussels’ growth agenda. His aides insisted they had been pushing for the measures being promoted by Mr Hollande long before he championed them. Similarly, at a Wednesday gathering of European grandees in Florence’s magnificent Palazzo Vecchio, Mr Monti – who entered office with subtle jabs at the Berlin austerity consensus – relished the chance to “gain German minds, and even more difficult German hearts, not to mention German pockets” for a more vigorous growth strategy in Europe. With three of the eurozone’s most important capitals – Rome, Brussels and Paris – in hostile hands, Berlin began to shift. When French polls closed, a hush came from the chancellor’s office. “No comment before tomorrow,” said Ms Merkel’s spokesman. He would not even confirm her calls to congratulate Mr Hollande and commiserate with Mr Sarkozy. But within days, even some in the mighty finance ministry, keeper of fiscal rectitude, began talking of jointly guaranteed “project bonds” and more use of the European Investment Bank to promote growth. Such things were anathema only six months ago. The most critical signal had come from Wolfgang Schäuble, finance minister and disciplinarian. Even before the ballots in France and Greece had been counted, he had dared to suggest Germany could increase wages faster than its eurozone partners. The signal was clear: it was time for Germany to do more for European growth.
Sunday, May 13, 2012
Will Germany Cave in to a Crumbling Europe?
Kanzler Merkel knows socialism and its nasty totalitarian tendencies from growing up in the oxymoronic German Democratic Republic, of unhappy memory. So now she's got to face a France which very narrowly tossed out President Sarkozy & installed M. Hollande in his place. Plus a refractory Greece totally out of control. Here's the FT take on the mess in the Eurozone: