Euro zone on the move … too slowly?
With Spanish Prime Minister Mariano Rajoy calling for a new euro zone fiscal authority to manage the bloc’s finances and send markets a signal that EU leaders mean business about defending the euro, it is clear that the push towards fiscal union, led by Germany, is gathering momentum. Germany has also conceded that Spain should get an extra year to make the spending cuts demanded of it, suggesting it is aware that the crisis is lapping at its door again.
But economic union, even if agreed (it runs contrary to generations of French political culture to relinquish that amount of national sovereignty) will take many months even years to put into practice, given the complex treaty changes that will be required.
The hope is that a strong signal of intent at the end-June EU summit will calm markets and encourage the European Central Bank to hold the fort in the meantime. The former looks like a somewhat heroic hope. On the latter? Well, the ECB has made it quite clear it wants government to sort out the mess but has also consistently proved itself to be the only institution capable of moving quickly enough when the crisis turns acute. So it will almost certainly intervene again if the bloc reaches the point of calamity, though that is more likely to take the form of an interest rate cut and a third round of three-year money creation than a serious revival of its bond-buying programme.
The governmental measures that could make a real difference – a banking union with a bloc-wide deposit guarantee scheme and common euro zone bonds – look a long way off although pressure is seriously mounting for the former with ECB chief Mario Draghi and Italian premier Mario Monti, among others, hollering for it. It is likely Germany would only be in favour after a lot of progress had been made on the economic union front. And no one has yet explained where the vast funds needed to underpin euro zone bank deposits and create a structure to deal with failing banks would come from.
But the mere fact that such dramatic measures are being discussed marks a step change in the bloc’s crisis management. Is it quick enough?
The ECB’s monthly policy meeting looms large over the week. It will produce updated economic forecasts likely to show the euro zone will contract more deeply than it had thought this year. That could serve as a hint that it could move to shore the currency bloc up.
The ECB and European Commission have floated some radical ideas over the past few days – on top of the bank stuff and the proposal to give Spain more time to cut, there are suggestions that the new ESM rescue fund could be allowed to lend to banks direct. Barring the relaxing of fiscal timetables, everything else looks difficult to put in place quickly, and it may have to be.
On the ESM, the process of ratifying its powers is still going through some national parliaments and was passed by others with very little enthusiasm. To change its remit to allow it to lend direct to banks would require the entire ratification process to be started again in the 17 countries. That would take months at best and some may well not pass it second time around. However, Spain continues to push for it and Washington is keen too.
On the bank deposit guarantee fund, the question is very simple: Who pays? There is talk of combining national guarantee schemes into an umbrella but we know that many of them have precious little capital. Spain’s for example claims to insure the first 100,000 euros of anyone’s bank stash but it has a maximum of 8 billion euros to call on to protect well over a trillion euros of deposits nationwide. If there was a bank run that would be like trying to bring down an elephant with a pea shooter.
There is something north of 10 trillion euros of euro zone bank deposits in total. So what would be needed in a guarantee fund to make it convince people that their money was safe. A trillion? Two trillion? Where is that going to come from or do policymakers think that by merely saying deposits will be guaranteed they will have done the trick?
Looking ahead, a Spanish bond auction on Thursday could be nerve-wracking, with 10-year yields heading towards 7 percent. France also holds an auction. It had been under some pressure in the bond market but since Francois Hollande’s election win, the spread over Germany has dived in and its 10-year yield has hit a euro era low.
On the Greek election, we will be left in the dark with a ban on opinion polls taking force for the last two weeks of campaigning. The last batch shows the race is too tight to call and the chances of a durable, stable government resulting are thin.
Madrid is due to announce how it will guarantee debt for its regions, facing big refinancing humps which they probably cannot surmount alone. That could be a big moment given regional debt and the state of the banks are the two big thorns in Spain’s side. And French parliamentary elections could put a fly in the ointment if Hollande’s socialists fare badly, hampering his ability to govern decisively.