/ 31 May 2012

Europe’s leaders face testing month of crisis-fighting

Employees chat under screens showing falling stocks at the Athens Stock Exchange.
Employees chat under screens showing falling stocks at the Athens Stock Exchange.

After two and a half years battling a debt crisis that has morphed into an economic crisis and now one of politics too, they face four weeks of critical decision-making that may mark a turning point or otherwise shunt the continent further into turmoil.

As well as fixed events, such as a second election in Greece on June 17 and France’s parliamentary polls, they must tackle the immediate pressures of Spain’s unstable banks, keep a wary eye on Italy, find ways to stimulate growth and prepare for an EU summit on June 28-29 to discuss the future of Europe’s economic and monetary union.

Many critical moments have come and gone over the past two years and eurozone policymakers are nothing if not good at finding ways of muddling through a crisis but there is also a sense in Europe and beyond that they are nearing a threshold.

“We are approaching crunch time. We are certainly getting nearer to some kind of denouement,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, an economic risk consultancy in London.

“At the end of the day, the key ingredients to shore up the eurozone are still missing – you don’t have a fiscal backstop, you don’t have a banking backstop and you have considerable disagreement among leaders about how to move forward.”

On top of that, the power balance that has dominated decision-making since the crisis began in Greece at the start of 2010 has shifted, with France’s new president, François Hollande, more openly at odds with Germany’s vision than his predecessor was, a stance that has altered the tenor of debate.

Seeking common ground
Allegiances can change rapidly in Europe and Hollande, who has drawn support from Italian Prime Minister Mario Monti and Spain’s Mariano Rajoy, may well seek more common ground with Germany once France’s legislative elections are over on June 17.

But for now, Chancellor Angela Merkel faces more opposition on more fronts than she has done at any time in the crisis. How that resolves itself may determine whether Europe takes bold steps in the coming weeks or moves deeper into uncertainty.

“To put it in Rumsfeldian terms, European policymakers are already uncertain about the things they know, to say nothing of the unknown unknowns,” said Spiro, who expects the crisis to worsen and predicts Greece will have to leave the eurozone at some point in the next two years.

“At this point I don’t see a sudden breakthrough. Shock and awe tactics are very difficult now because policymakers have been consistently behind the curve and Germany resists anything that has a shock and awe element to it.”

The moment that looms largest for Europe is Greece’s election. The latest polls show SYRIZA, the radical-left coalition that wants to tear up Greece’s €130-billion EU/IMF bailout, coming a strong second or possibly winning the vote.

If SYRIZA were to win and its 37-year-old leader Alexis Tsipras were to remain opposed to the bailout – as he shows every sign of doing – then the threat of Greece leaving the eurozone, with all its unpredictable repercussions for the rest of the region and globe, would become far more immediate.

Inconclusive election
Since the inconclusive election on May 6, when SYRIZA did better than expected and came second, analysts estimate nearly $3-trillion has been wiped off the value of global stocks – highlighting the knock-on impact a small country can have.

The vast majority of Greeks want to keep the euro, so in recent weeks European leaders have delivered a consistent message to Greece: if you want to keep the single currency, you had better back the bailout too.

That soft pressure on Greeks to ‘do the right thing’ may help pro-bailout parties do better second time around but even then Greece is far from out of the woods. It is behind on meeting targets in its bailout programme and must continue to push through highly unpopular economic reforms.

Andre Sapir, a senior fellow at Bruegel, a Brussels think tank that often informs EU policy, regards the Greek election as a lynchpin moment but says leaders also need to gain a longer-term perspective on resolving the crisis, rather than worrying about Greece today, Spanish banks tomorrow and Italy next week.

“If they get stuck with short-term issues, the eurozone cannot survive in this manner,” he said, going on to use the analogy of a marriage that has headed down the wrong road.

“When it comes to that point, either you say enough and you divorce, or you recognise that you have made a lot of mistakes, you sit down and talk about ways of refounding the marriage, doing the right thing for the children and the future.

“Europe’s leaders need to project themselves into the future. Like in a marriage they need to say, ‘if we’re going to have a future in common, then we need to do the necessary things now to build our relationship for the coming years.'”

Stronger and better
That is a message Mario Draghi, the president of the European Central Bank, has also delivered, urging leaders to take a 10 or even 20-year view on where they are going and to think through what changes to Europe’s economic and monetary union they need to make it stronger and better.

“How is the euro going to look like a certain number of years from now? What is the union vision that you have a certain number of years from now? The sooner this is specified, the better it is,” Draghi told the European Parliament on Thursday.

High-level discussions are already taking place among a select group to try to define what elements are required in an overhaul of the EU’s economic underpinnings, including a ‘banking union’ and ‘fiscal union’ to complete the framework.

At a summit on May 23, four of Europe’s top officials, including Draghi, European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso, were given a mandate to explore what changes are needed.

Their findings will form the basis of the discussions at the summit on June 28-29, which makes the coming weeks such a critical moment – not just for dealing with immediate issues in Greece and Spain, but the longer-term direction of Europe.

Ahead of that summit, especially at a gathering of Merkel, Monti, Hollande and Rajoy in Rome on June 22, some sense of what changes leaders envisage will emerge, and there is also likely to be a clearer idea of whether the power balance in Europe has altered, or whether Merkel remains the central decider.

And unlike TS Eliot’s poem, Europe’s leaders will be hoping they are not headed towards a waste land. – Reuters