 Meltdown
Eurointeligence Comment and AnalysisTime is running out fast for Greece. This is the last opportunity to use the crisis for far-reaching reforms for trust to return.
Italian spreads at 5.6%, French spreads at 1.5%, the euro a little over $1.35, and a general equity market rout wordwide. The eurozone’s latest “comprehensive solution” collapsed yesterday, as all the technical quick-fixes did before. We have now reached the bifurcation point in the crisis where the eurozone will, within days, have to make a choice between debt monetisation, which is hardly feasible without a political commitment to a fiscal union, and a break-up. The latter will happen if no decision is taken.
Reuters reports, citing unnamed EU sources, that French and German officials have been discussing a radical systems change, involving a smaller and more integrated eurozone. (We believe this story is true, but likely to make the crisis much worse. A break-up followed by ringfencing the core would, in a first stage, cause the total collapse of the financial system in Europe, including in Germany and France. We are not talking about crisis resolution here, but about the resurrection of Europe from the rubble.)
Napolitano signals a preference for a Monti-led government
This was as big a symbol you can get in Italian politics. President Giorgio Napolitano yesterday named Mario Monti a life senator, the highest political honour you can bestow on anybody in Italy. The move has been immediately interpreted as a political signal that Napolitano’s own preference is now for what is called a technical government of the centre, consisting of the Democrats (PD), current the main opposition party, the UDC, a party of Christian Democrat centrists, and a group of renegade MPs, who have left Silvio Berlusconi’s PdL for a variety of reasons. Corriere della Sera writes this morning that the real alternative is between a Monti-led government and new elections. Napolitano made it clear yesterday that he is seeking a very quick solution – within days rather than weeks – leading either to a new government or to new elections.
Beware of the technocrati
This is quite a brilliant comment by Robert Shrimsley of the Financial Times. He makes the point that there is now a possibility of technical government – led by Lucas Papademos in Greece, and Mario Monti in Italy, both former high ranking EU officials. While European officials may find this reassuring, it is not solving what is fundamentally a political problem in those countries. The problem with technocrats is that they have avoided the traditional routes to power. Shrimsley concludes the best politicians are also experts – they know what is politically possible. (we agree with this. It is another one of these quick fix ideas. The EFSF did not work. Leveraging did not work. The next delusion is technical government. The eurozone crisis is a major political crisis at heart. This is why the financial markets are panicking.)
Deal on interim government collapsed in last moment
High political drama in Athens as a deal on the interim government collapsed in the last moment. On a day that was bizarre and chaotic even by Greek political standards, Papandreou wished his successor well and headed off to meet the president together with Antonio Samaras– only for it to emerge that there was no successor due to feuding in the political parties, Reuters reports. Lucas Papademos appears back in the game again, after it appeared that Filippos Petsalnikos, the speaker of the parliament, would be appointed premier. .Papademos was subsequently contacted again for talks on the premiership. Kathimerini reports that he has set certain terms, which included all the coalition parties giving written commitments to adopting Greece’s agreements with the EU and IMF, more members of New Democracy in the interim administration than previously suggested, and for elections to be held later than February 19.
German constitutional court says 5%-threshold for EP elections is unconstitutional
The German constitutional court yesterday ruled the 5% threshold in German elections for the European Parliament is unconstitutional, Frankfurter Allgemeine Zeitung writes. The ruling does not annul the German 2009 election results but it will require Germany to scrap that rule in the next elections. The leaders of the two biggest parties, the Christian Democrats and the Social Democrats, expressed regret at the ruling and predicted a decline in the German influence in the EP. Both parties are dominating their respective European parliamentary groups at the moment. The fear is that there will be German splinter parties in the next parliament who are unable to organize themselves efficiently within the relevant parliamentary groups.
Bild fears that the euro rescues make it impossible to finance policies in favour of the Germans
Bild tells its 10m readers this morning that the German government earmarked €233bn in guarantees, but only €6bn in tax cuts for Germans in 2013 and 2014. Even if you take other important government expenditures into account, they are small compared the guarantees, Bild argues and cites €82bn for pensions, €38.7bn for the so called Hartz IV social handouts, the €38.8bn of subsidies for children or the €14bn of additional subsidies the government pays for health insurance. “Does the euro rescue burn all the money Merkel has?”, the daily asks.
Doubts about the Austrian AAA
As a result of the Italian crisis and the large exposure of Austrian banks to Italy ,Austria’s AAA rating may be in danger, Financial Times Deutschland reports. In two weeks the analysts of Moody’s will visit the country and economists think that they decide to place the country on a negative outlook. In order to calm markets, the government now wants to quickly imitate the German example and introduce a constitutional debt break.
Swedish central bank governor Ingves says the eurozone will survive
Asked by Financial Times Deutschland whether he was sure that the eurozone would still be around in its current form in a few years time, Swedish central bank governor Stefan Ingves replied: “Of course it will still exist.” Ingves, who has managed his own country’s severe financial crisis in the 90s advises the crisis countries to quickly decide how to address their fiscal problems and then to get on with painful reforms and to adjust their public sector to their willingness or ability to pay for it. He is not overly impressed with the current panic mood on the financial markets. “The pressure helps to concentrate the people’s minds on what they have to do.” Ingves, however, warns that a crisis produces financial losses to society that most likely cannot be recuperated later on. “In order to compensate for those losses we would have to engineer significantly higher growth later on. And we simply don’t know how to do that.”
(Ingves is quite wrong, of course. He retells the experience of a small country, which was able to extricate itself from a crisis at a time of strong global economic growth. The option of downsizing is not available to the world’s second largest economy. Our advice to the Swedes (and the Finns) is to shut up about their own experiences in the 1990s. They are completely and utterly irrelevant to the eurozone today.)
The ECB must become the lender of last resort, Nícolas Barre writes
Commenting in Les Echos, Nicolas Barre calls the ECB to finally become the eurozone’s lender of last resort. “This time it’s real”, he writes. “The markets are about to blow away Italy, the seventh largest economy world wide and the third largest issuer of sovereign bonds.” Given the situation the eurozone can no longer what Barre calls an “existential question”. Why is it that the UK with its public finances in a horrible state can borrow at 2.2% over 10 years while Italy has to pay 7.4%? The reason is that in the UK, as in the US, the central bank plays the role of the lender of last resort and the ECB must play this role in the eurozone as well, Barre argues. “The European Union cannot tolerate that one of its six founding countries is suffocated by a dogma. It will not survive otherwise”, he concludes.
Sarkozy bounces back in the polls
According to a CSA poll for Les Echos, Nicolas Sarkozy presently enjoys a spectacular comeback in France. The French president made a big bounce forward with 40% of the respondents expressing a favourable opinion of their president, 8 points more than in the last poll. The paper thinks Sarkozy owes this to his dominating presence in the media as a euro crisis manager. Francois Hollande however, his Socialist challenger, still leads the polls but he lost 5 points compared to the previous poll.
Spreads, Forex, and ZC Bonds
Our table below is a chronicle of the eurozone’s contagion. Italian spreads at 5.6%, Spanish spreads at 4.2%, French spreads at 1.5%. France is now where Italy was a shortly before the July summit.
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