The euro and the endgame
- 18 July 2011
- From the section Europe
It has not taken long, but increasingly attention is turning to the endgame of the eurozone crisis.
The scenarios fill the comment columns and seep into conversations, even with EU commissioners.
Everyone seems to accept that "the centre cannot hold, things fall apart". So every idea is in play: a break-up of the eurozone, Greece leaving, fiscal and political union, European bonds, a European treasury etc. It is at last being recognised that papering over and pretending cannot continue.
Firstly, the short term. Greece is in all but name insolvent. The first bail-out delivered in May 2010 did not work. Loans of 110bn euros (£96bn) failed. In the past year Greece's debt mountain has only grown. Its economy has slumped.
European leaders believed they were dealing with a liquidity crisis. They weren't. At its core they faced a sovereign debt crisis. So a second Greek bail-out of 125bn euros is being drawn up.
The funds are available. But that is not the issue. The Germans in particular - but backed by others - have insisted that private investors take some of the pain. Why? Politics.
Avoiding the D-word
The taxpayer, the voters, the people do not see why, once again, they should bail out other countries. It was never supposed to happen. As the Austrian finance minister put it, "you can't leave the profits with the banks and make the taxpayer shoulder the losses".
What has divided officials in the past few weeks is this: how do you get banks and pension funds to take a hit without it being declared a default? For if any rolling over of debt or extending of maturity dates is seen as a default then the fear is that it will spread to other countries and roil Europe's banking system. In one corner have been the Germans, in the other the European Central Bank. The ECB questions why inflicting losses on banks will help.
What has changed is a recognition that Greece needs some debt relief. Almost every economist believes that at some stage Greece will default. It can be now or later. The debt-to-GDP ratio is heading for 170%. There is no way a country can escape that trap, particularly with an economy in recession. So a way has to be found to write off part of the value of the debts.
So a dozen schemes have been on the table. There is now talk of private investors writing off 25-30% of Greek debt, either through a buy-back or a debt swap. It would need to be voluntary and somehow avoid being declared a default.
The ECB remains opposed, but the view in Germany is that it is unavoidable that investors will have to take a hit, forfeiting some repayments. Politically Chancellor Merkel has made private sector involvement in a second bail-out a condition.
If a solution is found a second Greek bail-out will be launched at a eurozone summit on Thursday. Of course the question will be asked: if Greece gets debt relief why shouldn't other countries? Steps may well be taken to extend the period of the bail-out loans already given to Portugal and the Republic of Ireland - as well as Greece - and reduce the interest rates.
All of this may buy some time, some relief, but it won't address the wider issue: how to convince markets and investors that Europe has a plan to address its debt mountains at a time of low growth.
Take Italy. How will it find the growth to reduce its debt-to-GDP, which currently stands at 120%? Italy stands perilously close to the edge. All it takes is a 2% rise in its borrowing costs for it to struggle to pay its way.
Which is why so many people leap forward to the endgame.
Some say there is a choice. Europe could take a giant leap towards integration and so all debt would become European debt. It could only do this with fiscal union - and that almost certainly would need the backing of political union.
Whatever happens German voters will have to be persuaded that it is in their interest to give more money to Greece. It will be a tough call. There is huge resistance in Germany to the idea of joint eurozone bonds - eurobonds. Jens Weidmann, the head of the German central bank (Bundesbank), said would be unfair to Europe's taxpayers.
Or: Greece is shown the door, offering it a sabbatical from the eurozone, allowing it the flexibility to default and devalue. A couple of other countries may have to follow too, but the core of the eurozone would be protected, and ringfenced. All of these countries could rejoin the single currency later. Nobody pretends it would be easy, but it might be preferable to risking the single currency.
Some are now openly advocating political union as the solution to the crisis. The former EU Commissioner Emma Bonino was refreshingly candid when I met her in Rome last week. She believes that a United States of Europe is the answer. She accepted that political union would have to be put to the voters.
The outcome would be uncertain, although the voters no doubt would be told they were voting to save the European Union.
Of course such a move would deepen the chasm between those in the eurozone and those outside. For countries like Britain it would be an immense opportunity to redefine its relationship with Brussels. Almost certainly if other countries were voting on a new relationship within the EU there would be pressure for Britain to hold a referendum too on what the British people want.
Even though the UK Parliament has just passed the European Union Act 2011, giving the people a referendum lock on further powers going to Brussels, there are still many in the Conservative Party who are looking for an in/out vote.
It could just be - with imaginative leaders - that a more flexible European emerges from the eurozone crisis. So much conflict and argument revolves around those seeking closer integration and those resisting.
In reality both integrationists and pragmatists are all pro-European. Their differences are over the role and influence of the EU and its institutions. If there was fiscal/political union for some countries others could adopt a much looser relationship.
The crisis might just be an opportunity for both integrationists and pragmatists to finally accept there are different, equally valid, visions for Europe that can exist side-by-side.
This is a time when what only recently would have been unimaginable is being debated.