The great shakedown in Cannes

  • 4 November 2011
  • From the section Business
  • comments

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.