European politics
Charlemagne's notebook
The euro crisis
Needed: a butterfly to still the storm
Nov 22nd 2010, 18:29 by The Economist | BRUSSELS
IT WAS the proverbial butterfly that caused the hurricane. On October 29th, leaders of the European Union agreed that they should re-open the treaties “to establish a permanent crisis mechanism” that would include “the role of the private sector”. The markets took this as a sign that bond-holders would be made to pay for future bailouts of troubled euro-zone members, and duly dumped the debt of the most exposed countries, notably Ireland and Portugal.
Now that the storm is battering Ireland, which has decided to grasp the life-raft offered by the EU, where has that butterfly gone? Germany keeps schtum about the need to make speculators pay. The European Commission, which was asked to draw up proposals for the “mechanism”, declines to speak of it. Herman Van Rompuy, the president of the European Council who is supposed to be consulting members on how to effect the necessary treaty-change, has taken a monastical vow of silence since maladroitly talking of the euro being in “a survival crisis”. For now everybody is trying to pacify the storm-gods, not antagonise them. They got a bailout for Ireland and the promise that curent bond-holders will not have to pay.
None of this means the butterfly has disappeared. Unheard in the thunder, it is still flapping away. Foreign-affairs ministers discussed it today at the EU’s general-affairs council, held to prepare next month’s summit. They seemed no closer to deciding how it would work, but Steven Vanackere, the Belgian foreign minister, suggested that had at least decided on a new name: they would stop calling it the “crisis-resolution” mechanism, but rather a “stability mechanism”. Mr Vanackere himself accepted this was unlikely to work: “It’s like calling the minister of war the minister of peace or the minister of defence.”
Spiegel magazine, though, seems to have more precise details of German thinking, contained in a “non-paper” that the German finance minister, Wolfgang Schäuble, is preparing to present to fellow-ministers in early December. One senior European source tells me that markets these days listen only to what Germany says, so let me quote Spiegel’s account:
"According to the Germans' plans, the conditions for all new bonds in the euro zone would include a debt restructuring clause as of 2013. The goal of the clause is to "make it possible to achieve a legally binding change in the payment terms through majority decisions of the creditors in the event of the debtor's inability to perform." The document lists maturity data extensions, rate reductions and debt waivers as measures.
A neutral chief negotiator would mediate between bankrupt countries and investors. "This task should be assigned to an inter-governmental institution that can also be a provider of financing at the same time," the document reads.
The new facility could also provide ailing countries with liquidity assistance. The money for the program would come from two sources. First, there would be the revenue from the penalties euro-zone countries would pay for repeatedly violating the upper deficit limit. Second, the euro-zone countries would pay into the fund, with their contributions possibly being based on their shares in the ECB.
A condition for the procedure is an analysis of a country's "debt capacity" prepared by the European Commission, the ECB and the IMF. German government experts are convinced that their plan will be successful. "The affected country gets a realistic prospect of quickly regaining its reputation and trust," they write, while the creditors would receive the chance of "securing a portion of the value of their bond."
The drawback of the plan is that it cannot go into full force in 2013, because not enough bonds with restructuring clauses will be on the market right away. Recognizing this weakness, the government experts concede that there would be a transitional period. This would amount to a "period of six to eight years, for which transitional solutions will have to be found."
The problem, as Mrs Merkel has discovered, is precisely how to manage the transition from blanket protection for bond-holders to a system where they are exposed to greater risk and, in turn, impose greater discipline (and impose it earlier) on sovereign borrowers.
The view among most European leaders is that all this would have been easier to deal with next year, once more stringent rules to monitor countries’ deficits, backed by sanctions, would be in place. By then, the hope was, the markets would have settled down. So should the matter of a restructuring system be dropped as a bad idea?
Probably not. Now that they have been stirred, the markets are unlikely to be assuaged by yet more uncertainty and speculation. The best hope is to settle the matter as soon as possible. Call it what you want - a crisis-resolution mechanism, a stability mechanism, a peace offering to the gods – but a plan is needed sooner rather than later, with clarity about how it will be phased in after 2013. This time, though, leaders should deliberate knowing that, as one source puts it, “the markets are at sitting at the negotiating table”. The storm could get worse before it gets better. Hold on to your hats.
About Charlemagne's notebook
In this blog, our Charlemagne columnist considers the ideas and events that shape Europe, while dealing with the quirks of life in the Euro-bubble. Follow Charlemagne on Twitter at @EconCharlemagne
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No matter how one reads the suggestions about 'the new bonds',made by the Germans,it still seems to me that the investors will regard them as junk bonds. The adage of a sow's ear and a silk purse comes to mind.
I couldn't agree less with the opinions expressed in this article. Things happen for a reason, and the reason some European countries are defaulting (sooner or later) is that they have been taking too much but giving too little. The have been living beyond their means and that is the first thing an economist should tell us about. All these mental masturbations about the markets thought this and the Germans did that...you need to put two and two together first, or people will not take you for a serious newspaper anymore.
I think my previous commentator "generated4029045" talked much more sense than the Economist in this article..
"First, there would be the revenue from the penalties euro-zone countries would pay for repeatedly violating the upper deficit limit. Second, the euro-zone countries would pay into the fund, with their contributions possibly being based on their shares in the ECB."
This is nonsense. There were a lot of countries repeatedly violating the existing upper deficit limit. Never, never any of them paid a single Eurocent penalty, so why should this be different in the future?
And it should not be forgotten that 6 years ago Germany and France missed the targets repeatedly, and what did they do? They strongarmed the rest of the Eurozone to accept higher limits.
All this rescuing of banks and countries will be paid for be the taxpayers only. Most of it by the german ones, who never Being a german taxpayer who did never participate to the party (there was and is a huge coaliton of politicians, firms and unions who took care that the real income raises and buying power of main street people in Germany was and is kept low).
Here is what will happen if this ill-conceived mechanism is put in place. Once sovereign default risk is built into the system, the markets will price debt accordingly with massively higher yields being permanently applied to the Member States considered to be at risk. As a result, the current "market volatility" will be institutionalised.
The only way to deal with recalcitrant Finance Ministers who ignore prudent stability targets is the one that should have been used from the outset: humiliation in front of their peers. The successive Irish Finance Ministers who presided over the property bubble happily ignored warnings being offered at home. However, I have no doubt they would have mended their ways if the first item on the agenda of every Ecofin Council meeting was a request from the Chairman to them to explain what the hell was going on with house prices in Dublin higher than in Paris/rents on Dublin's main shopping street the 5th highest in the world, etc.
The problem with the EU institutions is that, apart from the occasional temper tantrum on the part of Sarko, everyone is too damned polite.
In the US, we do call our "Minister of War" the Secretary of Defense.
The Germans are fair. April 2013, nobody can say now he didn’t know.
The Germans are not totally stupid. A panic-coup, as it happened in May against their financial sovereignty, with the table-banging aggression from President Nicolas Sarkozy and an intervention on the telephone from President Barack Obama to get Merkel to agree to the euro package, will fall flat in future.
If Sarkozy or other eurozone leaders threaten the Germans again “to leave the euro” then the Germans are prepared to say, “faites-le ensuite”.
. . . And, not unimportant: The Economist can’t call a responsible-minded German chancellor any more “the bully in the room” without being publicly charged of libel.
Merkel’s warning, “if the euro fails, it is not only the currency that fails, then Europe fails; the idea of European unity fails” was meant literally, since a majority of the Germans would definitely turn their backs on the EU in this case.
Dear Charlemagne/Karl,
given that you're now reporting on European affairs you might consider learning German, in which case you would discover that it's stumm rather than schtum.
Best wishes,
Nicholas
@ nnVKZgtcf6 / Nicholas:
Don't be so arrogant. "schtum" is correct.
http://www.phrases.org.uk/meanings/215700.html
http://www.urbandictionary.com/define.php?term=schtum
Can someone please tell Mr. Van Rompuy to keep schtum permanently? Now he's claiming there's no problem whatsoever with regards to the Portuguese economy. So the bond markets clearly do not know what they're worried about.
Care for some anecdotes regarding the president of the EU? I had him as a lecturer for public finances in college. He had already held office at the time so you might expect some insights into politics and current economic affairs during the lectures. Wrong. A strict focus on the subject and all very orthodox theories ('you cannot keep spending forever whithout some painful adjustments at some point in the future') delivered in a bland way. Mr. Farage was not too far off the mark when he made that remark about Mr. Van Rompuy's charisma.
So Mr. Van Rompuy could claim he's a sound administrator based on what he taught his students. Wrong again. During his stint as prime minister there was another crisis regarding the number of asylum seekers coming in and a potential row was brewing about the measures needed to deal with it. The PS wanted a blank cheque and he wrote one. He didn't even put up a fight. 'The resources will be made available'. That man has no spine.
By the way, was he not supposed to deliver a piece on economic stability back in October? Anyone seen any trace of it?
The solution for the crisis is simple. Promote that the financial markets to work as usual, and the money starts do flow as it should. The supervisor authorities that had been in the past overconfident, should do their job consistently and in a responsible manner. Forget the panic news without any credible basis, and the rating agencies reports proved to be incompetent and unreliable during 2008, 2009 and 2010. let's make sure that politicise, speculators and hedge fund managers are under control. and the financial world will provide as always the solution to all debts not depending on Super heroes like multilateral banks or central banks. Let's empower the ones that for ages and decades have been supporting the economic and financial growth and development. There are GOOD Professionals in the financial system that must be trusted. Just Few of them were Bad people - the over ambitious ones. The major part of the financial system is reliable and the proof is that in spite of all this mess, European Banks and FI are in good health without the support or intention of their Governments. Banking system is supporting Governments right now and suffering from that but still resilient.
A restructuring of the Euroland financial system is now inevitable. You can kick the can down the road only so many times. Perhaps they can repeat the "rescue" stunt one more time in Portugal, but with Spain they will have reached the end of the road.
Brussels Insider is completely correct. Of course the markets will price debt even higher when they realize their money could be lost through political decisions. Without an additional premium - who would risk money in scheme like that ? It seems the time has come to realize how much the Euro really is an experiment. And the time to decide will have to come sooner rather than later. Who will feel safe sending money to Spain or Portugal now ?
la viriti can't prevent himself for spreading his antifrench sentiment, your Merkel had a election agenda, that's why she delayed the Greek bailing-out problem, but that she had to fulfil nonetheless, cuz Germany was full in (like us), but our banks were/are better capitalised, so, a greek default wouldn't have been a catastrophe for our banks, but for german banks a certainty ! so, the day after her party lost the elections, she suddenly praised the euro and the EU, that none had interest to see the euro crambling, nd sure the Germans first, LMAO
It's not Merkel that threatened to leave the euro, but Sarkozy, and see who came back to better relations with him !!! la Putzdam princess !!!
Irish Debt Crisis Threatens Political Status Quo
Europe's struggle to deal with its debt crisis is under increasing strain as political infighting in Ireland threatens to delay a massive bailout and bond market jitters shake Portugal and Spain. http://www.newslook.com/videos/268843-irish-debt-crisis-threatens-politi...
Instead a German "non paper" I propose an NGO with a memo like that:
Objectors YOUTH AGAINST PUBLIC DEBT
The generation that currently reaches around 25 years
MANIFEST
1. We are the victims of the present and the next future economic policies currently carried by the governments of any political party.
2. Our generation currently suffers the largest unemployment rate among all groups and especially indicted by the economic crisis fueled irresponsibly by both Governments and private financial institutions.
3. The economic policies carried out by States are not targeted in any way to solve the problems of our generation.
4. The actions of governments are based almost uniquetly in implementing sovereign debt to finance unproductive policies that have and will have a negative and unacceptable impact for our generation.
5. The debt acquired by the government, both in its amortization as in interest payments will fall on our generation.
6. Our generation, lacking in the present moment of political representation and powerless to defend their interests, pose clear through this MANIFESTO its position against the action of public agencies and financial institutions and so therefore
a. We report publicly this debt as a result of the irresponsibility of the governments in power and for the benefit of previous generations who make the cost of this debt to our generation unacceptable .
b. We advice as well that when our generation achieve political power, reserves the right to consider this debt as nonbinding as well as non obligation to pay it
c. With this MANIFESTO we warns to the Institutions, both public or private about the risk for irresponsible funding the government’s public debt and trying to make our generation paying for it
d. Is our right to decline any responsibility in serving this debt.
@ TB1967
Given that the reference is to the German government and the word is written in italics I think we can assume that the intention was to employ a German word rather than a loan.
Anyway the broader point is that most British journalists covering Europe have no more than school French and don't even bother with German. I very much look forward to keeping shtoom when proven wrong.
Butterfly? That's a particularly poor analogy. The flap of a single butterfly's wing is the insignificant event that is proposed to lead to a grand outcome through a chaotic process. Reopening EU treaties is hardly an insignificant event. The relevant analogy would be to the one bond buyer/seller whose single decision leads to the meltdown of Irish finances.
about time germany claims the no spot in europe if they had been in charge in 2007 this gfc would not have affected europe
The bottom line of this whole euro affair is that Mrs Thatcher and Norman Tebit, among others, are having the predictions they made all those years ago proved right. For countless reasons the euro just cannot work in the long run. Pity 'The Economist' has sat on the fence for so long.
As far as I am aware the word schtum when used in english derives from Yiddish not from German. This would explain the difference in spelling and the italics.