The great shakedown in Cannes


It's a bit rich for France and Germany to talk about Greece holding the rest of Europe to ransom, when the eurozone is in the process of doing the same to the global economy. And with the rest of the G20 not in a position to play the kind of hard ball with France and Germany that Chancellor Angela Merkel and President Nicolas Sarkozy played with the Greek prime minister on Wednesday night.

Or that's what the French and German leaders are betting.

Think about it. As a group, the eurozone economies comprise just over a fifth of the world economy, a similar share to the US. They are some of the richest countries in the world.

And yet, they have so mismanaged their affairs - with such devastating potential consequences for the global economy and its financial system - that the rest of the world believes it has no choice but to come to its rescue.

US officials are exasperated with the Europeans. All along, the US Treasury Secretary, Tim Geithner, has been saying the eurozone had to clean up its own mess - and reminding them that the continent had ample resources, as a group, to do it.

And, he would add, they have a handy institution for putting an end to liquidity crises, with an unlimited pot of money at its disposal. It's called the European Central Bank.

But, Mrs Merkel would always respond, it's not that simple. You must understand that we are 17 democracies, with our own political challenges to face - and our own histories. In the case of Germany, that includes a scarring memory of what happened the last time a central bank "came to the rescue" of the government.

As I said last night, the new ECB president, Mario Draghi, made clear on Thursday that he would not be running to the eurozone's rescue.

On Greece, he said that it was simply not in the treaty for a country to leave the euro. But more interesting, to the bond markets, was what Mr Draghi said about the Securities Markets Programme: the ECB's purchases of bonds from Italy, Spain, Greece and the rest.

He said the SMP would continue on precisely the same terms as before, which some took as a break with his predecessor, Jean-Claude Trichet, who had suggested it would end when the eurozone's rescue fund was operational.

But Mr Draghi repeated, several times, that the programme would continue to be temporary, limited in scale, and entirely related to improving the functioning of monetary policy (ie. not about saving governments' skins).

The financial markets have trouble believing the last part, which suggests the decision to buy bonds is entirely unpolitical.

(Most Germans have trouble believing it too. They think the ECB has already been hijacked by the over-spending periphery.) But the bit about the programme being limited in size is all too believable.

The key point about lenders of last resort is that they use the word "unlimited". Mr Draghi has given little indication that he ever will.

So, where does that leave the eurozone - and the G20? The answer is it leaves the Americans, British and others trying to force the Europeans to cough up what G20 sherpas call "deliverables" on the future of the eurozone, before the rest of the world agrees to increase the firepower of the IMF.

One of those deliverables will be more detail of the plan to soup up the European rescue fund - to miraculously turn 440bn euros into 1 trillion euros or more. Given how much little detail there was last week, that surely won't be too hard. We now know that another move will be enhanced IMF surveillance for Italy.

Investors will think it's not much of a leap from that, to a fully fledged "precautionary" funding programme for Italy, along the lines of the loans given in recent years to Mexico and Poland.

The point of these programmes is to give added security to countries with "good" policies who get caught in bad market conditions. (In the jargon: the victims of "liquidity" crises, not solvency ones.)

That is what officials want investors to think. But the kind of numbers being talked about for the IMF - on the order of 300-500bn euros - do not, in themselves, add up to much more than a security blanket for the likes of Italy. Of course, the IMF has other resources left to play with.

But this is no 'firewall' for a country who needs to raise 300bn euros in the markets in 2012 alone. The figure for Spain is 165bn euros.

That's the awkward thing about this great shakedown in Cannes. If the countries of the eurozone are really determined to mess up this single currency of theirs, there isn't enough money in the world to save them.

Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

Read full article


Jump to comments pagination
  • rate this

    Comment number 1.

    Seeing the way the Europeans have behaved to each other, to the weakest amongst them, their populations, the 'rules' and that quaint thing called democracy ...well it's enough to turn a Europhile in to a Euro sceptic.

    Actually it has, me.

  • rate this

    Comment number 2.

    Bit rich for the Americans with their collosal and unmanageable debt to lecture anyone.
    Frankly the worlds finances need a big shake up, most countries have huge debt serviced by shuffling promisses about debt around and around... this can't go on for ever. A huge shake up and break down is on its way,and out of it will come a better future.

  • rate this

    Comment number 3.

    USA's Geitner is right the ECN does have enough tools to devalue the Euro by printing trillions & when the Euro is devalued the vultures will swoop to buy up German & French & other corporates with hostile bids.

    But the lesson of Argentina 's default is that a country that defaults can recover much more quickly than a country that is saddled with trillions £'s in long term debt like the UK.

  • rate this

    Comment number 4.

    Merckel may have read about the 1930s but she should re-read the S&G pact intended to prevent it and her own gov'ts arguments to rescind penalities for it when it and France violated it year after year and should have paid penalties.Unprincipled, mendacious, arrogant beyond words, ruthless, heartless, self serving, hypocritical, Europe's history bounces from one self induced catastrophe to another

  • rate this

    Comment number 5.

    Good to see La Flanders enjoying herself in France. She seems to spend more abroad these days. No austerity at the BBC then...........


Comments 5 of 80


This entry is now closed for comments


  • NS Savannah, 1962Nuclear dream

    The ship that totally failed to change the world

  • Espresso cup7 days quiz

    Which city serves the strongest cup of coffee?

  • Glasgow 2014 quaichs and medalsQuaich guide

    What do the Scottish gifts given to Games medallists symbolise?

  • Malaysian plane wreckage in UkraineFlight risk

    How odd is it for three planes to crash in eight days?

  • israel flagDos and don'ts

    Can you criticise Israel without being anti-Semitic?

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.