Bond investors are waiting for Europe’s leaders to come up with a more credible financing scheme to support distressed eurozone states to overcome the crisis in their sovereign debt. Government bond yield spreads over German Bunds in the peripheral eurozone states of Portugal, Ireland, Greece and Spain – the Pigs – remain at record highs.
Germany and France have combined to propose conditions for expanding the eurozone emergency debt financing mechanism, the European Financial Stability Facility (EFSF). Tortuous negotiations are under way with a deadline of March 24 set for a deal when Europe’s leaders have a summit meeting.
Germany will eventually have its way and even if only some of the conditions proposed under the Franco-German plan are implemented, eurozone public finances and the euro will be better off.
In this column, I have argued before that the days of Germany sacrificing itself on the altar of European Union for the atonement of war guilt were over. The Germans would henceforth behave in the same selfish vein as other EU states. Far from heralding the death of the euro, this meant that the flight crew in the cockpit would be German and the euro would be run according to German principles.
Nothing in all of the recent euro shenanigans portends anything else. This flight’s final destination is locked on the screen. The journey might be bumpy but there’s little doubt about the destination.
I have outlined the lacunae that needed to be plugged for the euro to be solidified. The list included a bigger EFSF (or successor mechanism) and lower borrowing costs. The EFSF has become the required fiscal transfer mechanism to back the unified monetary policy of the eurozone.
| The twin sources of the euro debt crisis |
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| Source: Independent Strategy |
To make this gel, there has to be proper conditionality applied to any EFSF loan and firm policing of a wide range of economic variables that measure whether a state is becoming a liability to the currency union and a danger to itself. And the EFSF needs to be able to address the issue of bank recapitalization as well as sovereign leverage. A lot of the smaller EU governments (most of them not yet members of the eurozone) have squawked loudly because they weren’t consulted on the Franco-German master plan. They claimed it would infringe their sovereign right to misgovern themselves (as one should rather hope it will). And of course, there would be fewer free handouts from the EU.
This squawking is excellent, if unmusical. It indicates that the countries that either are, or aspire to be, in the eurozone have got the message that adherence to it means being a member of a tough-love club and not a spongers’ paradise. If some choose not to join as a result, so be it.
From the German position, such squawking is music to the ear because it makes it possible for chancellor Angela Merkel to tell her domestic doubters that she is inflicting pain as never before to ensure that the euro is solid. The German Volk will love it.
Behind the smoke
Of course, five decades of EU watching does not pump the blood with bubbles. Neither does this new German-piloted trajectory for eurozone and EU affairs. But let us suppose that, behind all the smoke and mirrors and the inevitable compromises, 25% of what needs to be done does get done. Is the euro then better off than before the crisis? It has to be better off because the very gaps in its architecture that the euro sceptics excavated to predict its downfall will have been plugged in part, if not completely.
To air a prejudice, the key element in the German plan is the imposition of their Schuldbremse (balanced budget legislation), throughout the eurozone. Nothing in my view would be more effective at shrinking the bloated European state and creating room for a more dynamic private-sector economy.
The consensus is that the Germans will never live up to this and that the world is littered with balanced budget amendments that are honoured in their abeyance. My reading is that serious democracies run by serious people generally do implement their balanced budget legislation. The Germans are all of that. So the whole euro debt thing will be wrapped up by the end of March.
David Roche is president of Independent Strategy Ltd, a London-based research firm. www.instrategy.com