Fear in Europe as eurozone crisis deepens

 
European Commission President Jose Manuel Barroso (second right) talks at the European Parliament, Strasbourg, France, 14 September 2011 For European Commission President Jose Manuel Barroso the vision of a united Europe is at stake

Fear is coursing through the corridors of Brussels. It has been there for some time, usually unspoken or understated. It is now in the open. It is the fear of losing control of events. It is the realisation that most ideas have been tried and still the eurozone crisis deepens.

In the absence of a plan, officials have turned to shock treatment. This was the moment to frighten.

First up, European Commission President Jose Manuel Barroso, for whom this is now an existential crisis. "We are confronted with the most serious challenge of a generation," he told the European Parliament in Strasbourg. "This is a fight for the jobs and prosperity of families in all our member states. This is a fight for the economic and political future of Europe. This is a fight for what Europe represents in the world. This is a fight for European integration itself."

In his final words the warning was clear; the whole vision for a united Europe is at stake.

Next up, Polish Finance Minister Jacek Rostowski. He warned that crisis could destroy the European Union. "Europe is in danger," he told the parliament. "If the eurozone breaks up, the EU will not be able to survive."

For German Chancellor Angela Merkel, too, there is no Europe without the euro. These statements come without any explanation as to why the EU would fold without the single currency.

No relief

For more than 40 years Europe's political class has signed up to the narrative of "ever-closer union". Certainly in Brussels it has been the dream that has guided all the treaties and the institutions; that Europe was moving inexorably towards greater integration. There may be crises, bumps in the road, but its destiny was clear.

For this generation, uncertainty now hangs over their project. They can no longer be certain of their kind of Europe. They no longer own the vision.

For 18 months, Europe's leaders have thrown everything they can at solving the eurozone crisis. Summits have come and gone. Finance ministers have argued late into numerous nights. Sarkozy and Merkel have met frequently.

To date it has been in vain. Greece's debt-to-GDP ratio has only increased. Its debt mountain has climbed. Its economy is in free-fall - contracting this year by anywhere between 5 and 7%. The wages of civil servants have been cut by a fifth. The country's budget deficit remains stubbornly high. Construction in the first part of this year is down almost 50%.

The EU has approved a second bail-out, but still there is no relief. The country seems caught in a cycle of decline. That is why in Germany an orderly Greek default has arrived on the agenda. Most economists I speak to say that default is inescapable.

European officials are desperately trying to close that door.

Crisis of legitimacy

This was the EU's Economic Affairs Commissioner Olli Rehn today: "Let me say a word to those insisting Greece would be better off outside the euro. I very strongly disagree: neither Greece nor the eurozone would be better off. Whichever way you look at it, it is absolutely certain that a default and/or an exit of Greece from the eurozone would carry dramatic economic and social and political costs - not only for Greece but also for all other euro-area member states and EU member states, as well as for our global partners."

President Sarkozy told his cabinet France would do everything in its power to save Greece. Angela Merkel echoes that. But the core of the eurozone problem is this: High debts. No growth and a fragile banking system. The problem is that public opinion - particularly in Germany - has hardened against further aid for Greece or elsewhere. The Greeks too are stubbornly resisting the years of austerity that lie ahead.

Mr Barroso said the answer was more integration, more Europe. That is the dangerous fork in the road. The officials believe that the only answer lies in economic union but they have not brought the people with them. It is a debt crisis but a crisis, too, of legitimacy.

What the Germans are being told is that the future of the EU is on the line - and that might give Chancellor Merkel some room for manoeuvre. But events have their own momentum.

 
Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

Comments

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  • rate this
    +7

    Comment number 1.

    It's unknown what the exposure of various financial institutions to a Greek default through credit default swaps *CDS) might be. But SOMEONE has been selling lots of protection on Greek debt over the last few years, and a default would trigger a "credit event" payout on these insurance contracts. I wonder who that SOMEONE may be...

  • rate this
    +6

    Comment number 2.

    Doubts about stability of financial institutions with direct & indirect exposure to Greece are likely to spread. Banks may hesitate to extend credit to each other out of fear about exposures. Many will require counter-parties to hand over additional collateral, forcing assets sales. In a repeat of the aftermath of the bankruptcy of LEHMAN Brothers, global credit markets may seize up.

  • rate this
    +10

    Comment number 3.

    Stop floging a dead horse, Greece cannot stay in the eurozone, also a lot of other ecconomies. the cost of this european unificated is too expensive and the time scale is too short, there are still people in the UK who still can't come to terms with the Normans let alone the rest of europe. European union may come within the next 200 years, just don't rush it, in the meantime cheap holidays.

  • rate this
    +3

    Comment number 4.

    US Money-Market Funds Challenged:
    Analysts say US money-market funds have more exposure to the short-term debt of European banks than MANY INVESTORS REALIZE. If European banks cannot roll over their commercial paper, some of these money-market funds may find they have capital shortfalls.
    Is this the real concern? Is it American hedgers who are all a-dither?

  • rate this
    -1

    Comment number 5.

    With EU banking system's financial woes currently dominating the headlines, investors might be very surprised to discover that it's actually the US financial system that is real weak link in the event of a Greek debt default. Investors aren't even aware!
    Moody's isn't helping. In addition to its French downgrades, US-BASED CREDIT RATING made it clear there are more banks in rest of EU...

  • rate this
    +4

    Comment number 6.

    It's taking its time but are we getting there, yes - eurobonds. It is the only answer. A federal fiscal policy will have to come as well and will not be before time. Unless Europe handles these errant states who will never be able to control their overspending or their ineptitude to gather in an efficient manner taxes nothing else will work. Otherwise just cancel Europe.

  • rate this
    +5

    Comment number 7.

    US banks have @ $41B direct exposure to Greece. US money-market funds are heavily EU exposed. Recent report in Wall Street Journal said 2 large banks Moody's downgraded - Credit Agricole & Societe Generale, get a significant amt of their short-term funding from America's money markets. Interconnectedness of US banks & money-market funds (many at risk from a Greek default) is sobering.

  • rate this
    +2

    Comment number 8.

    Hardly surprising that Brussels-centric eurobonds have emerged as the Commission's preference, especially as the clandestine approach of ECB bond-buying is clearly in the public eye. A fair amount of 'eurobond-like' activity can already be detected in recent heavy recourse to the EIB by the crisis-hit peripheral members (EUR 3.5 billion from the EIB to Portugal, 3.2 billion to Greece in 2010).

  • rate this
    +7

    Comment number 9.

    "If the eurozone breaks up, the EU will not be able to survive." - a ludicrous assumption, Poland isn`t even a member of the EMU.

    Ever closer union, endless bailouts or a transfer union are not only unpopular in Germany, but also have no backup in most of the stronger Eurozone economies, e.g. Austria, the Netherlands or Sweden.
    Should Germany pull the ripcord, they will not end the EU in anger.

  • rate this
    +1

    Comment number 10.

    Wonderful news; at last those of us who predicted the debt and Euro crisis many years ago, and who were told we had no vision, will be shown to be right.
    Eurobonds and intergration will only make the inevitable collapse even bigger. Right now it'll be awful, but store it up more and there'll be a revolution.

  • rate this
    +1

    Comment number 11.

    Yeah - they fear the Eurocrat wallet gropers like Barroso - a more painful and tighter straightjacket coming and yet more wallet groping from Brussels

  • rate this
    +1

    Comment number 12.

    ironic that the markets have no confidence in the euro, it weakens against the $ and yet money is pouring into German bonds which are euro denominated... a further irony is that without the likes of Greece but based on Germany,Holland and a few others, the euro would be very strong which would put their industry at a serious competitive disadvantage. The euro and europe needs all its members....

  • rate this
    +7

    Comment number 13.

    @6 Patrick Warwick
    "It's taking its time but are we getting there, yes - eurobonds"

    I don`t know if other nations` constitutions allow fot this, but Article 79 (3) of the German Basic Law forbids amendments to Art. 1-20 of the constitution, which rules out any more surrender of national sovereignty.

    Each eurobond tranche would require to be agreed on by the Bundestag seperately = no eurobonds.

  • rate this
    +2

    Comment number 14.

    I think eurobonds are a sensible move, but absolutely not before the weaker states have written down their current bonds (voluntarily or via default), otherwise eurobonds would just be another means for exposed investors to offload their risk onto european taxpayers. They should also be collateralised to help ensure fiscal compliance from each state. Yes, implies a Lehman's banking crash first.

  • rate this
    +3

    Comment number 15.

    The political classes are still in denial, mainly because their years of self awarded largess are drawing to a close.

    They have built a house without proper foundations, arguing over the colour of the curtains rather than the thickness of the walls. Along comes the first strong wind and...poof! down it comes. What a surprise. Which part of "when in a hole stop digging" can't they understand?

  • rate this
    +1

    Comment number 16.

    The next 'big thing' will be the Spanish banks and the debt they hold owed by property developers who have no hope of re paying it. It is still on the books as performing debts - billions of it!

  • rate this
    +2

    Comment number 17.

    @DurstigerMann

    Poland isn`t a member of the EMU but is a current EU Presidency - that's why the comment made by the Finance Minister before the EU Parliament.

    "...no backup in most of the stronger Eurozone economies, e.g. Austria, the Netherlands or Sweden."

    Sweden is not a member of the Eurozone (not even in ERM II) and actually is doing pretty good without the euro.

  • rate this
    +1

    Comment number 18.

    This has very close parallels to the panic that forced the US congress to go with the American bail outs in 2007, Michael Moores film Capitalism a love story is very good with the largely untold narrative of that particular heist against the common interest. The whole FIAT money thing is blowing up in the face of the corporate elitist hegemony read some Chomsky and see Dr Mike Haywood. Its a Con

  • rate this
    0

    Comment number 19.

    Bluesberry If US banks have E41b exposure to Greece how much is Greek govt debt? If Greece goes bust that means the govt goes bust not all Greek companies and people. Greece going bust would cost US banks maybe E10-15b, a big number but entirely manageable.

    Greek default is inevitable, it should not be a surprise, they have defaulted regularly over last 200 years.

  • rate this
    -2

    Comment number 20.

    #15 Beautifully put.

 

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