Days, maybe hours, to save the EU
The words of Spain’s Foreign Minister, José Manuel Garcia-Margallo yesterday evening.
Absurd hyperbole to try and spur the Germans into action, or a precient warning that in this slow-motion train wreck, the wheels may finally be coming off the rails? Take your pick. And this before we get to the Greek elections on Sunday.
One of the motivations for last weekend’s €100 billion bailout deal was to batten down the hatches, to get the Eurozone ready for whatever may happen in Athens next week. Shore up Spain’s banks, reassure the markets, make sure everyone knows that a Greek exit can be contained. Well that seemed a good idea at the time.
In fact the bailout only made things worse. Because it was a loan, not a grant, it undermined the Spanish government’s financial position, made investors worry that others would be repaid before they would, and persuaded many Greeks that Europe would blink if pressed hard enough.
The rating agency Moody’s were unequivocal when they explained why they downgraded Spain so severely this week:
Moody's action to place the government's rating one notch above speculative grade reflects the rating agency's view that Spain has moved much closer to needing to seek direct support from the European Financial Stability Facility / European Stability Mechanism.
In other words, get a full bailout of the kind given to Greece, Ireland and Portugal. So one bailout made it much more likely that Spain is going to need another one soon.
It has also helped convince many Germans that the bailouts are getting out of hand and that the bill heading their way if the Euro collapses is so huge that it will wreck their economy. One leading and very influential German commentator this week calculated that in a worst-case scenario the German taxpayer is currently liable for a cool €1 trillion. Even for the Germans, that’s big bananas.
They are pointing out, not unfairly, that huge transfers like this were specifically ruled out by the Maastrict treaty and have been declared unconstitutional by the German Constitutional Court. For those who think that Angela Merkel has been obstinate and obstructive to the point of bringing the whole Euro project to its knees, one should remember that she and the Bundesbank have already gone way further that either German or European law allows.
So is there a way out of this that doesn’t involve Merkel and her party performing a complete u-turn and opening the cheque book to 'mutualise’ (i.e. pay off) everyone else’s debts? If there is, I haven’t heard it yet. This morning in Madrid every expert I spoke to insisted that "at the last moment the Germans will do the right thing. You see they have to." Chancellor Merkel repeating - yet again - this morning that she’s not going to budge hasn’t dampened the optimism here that "the Germans won’t commit suicide".
Even the estimable Foreign Minister Garcia-Margallo, when I caught up with him this morning, was rowing back from his apocalyptic language of last night:
I really believe the leaders of the EU should give a clear and strong message to the market that we have decided to keep together in defending our currency.
For ‘leaders of the EU’ read ‘Frau Merkel’.
Until the Greek result is known, there’s not a great deal more that the rest of Europe can do. If the world wakes up either to paralysis, or a far-left Government in Athens on Monday morning it could be a very bumpy week indeed. If the conservatives have enough votes to form an administration - however shaky - then the Eurozone will have bought itself a few more months.
For the future of the single currency it is not at all clear whether a sudden shock and the reaction that would follow would actually be any worse than continued uncertainty and slow decline.