European politics

Charlemagne's notebook

  • The euro zone's treaties

    That clever Mr Legal

    Dec 18th 2011, 19:43 by Charlemagne | BRUSSELS

    THIS will be my last blog post this year. But although Charlemagne is taking a break, the EU machinery, perhaps unusually, is working overtime over the festive season. It is trying to gift-wrap the new treaty that leaders agreed to draw up over the head of Britain's prime minister, David Cameron.  

    My piece this week on the British row argues that the bust-up could yet go either way: towards a progressive deterioration in relations that might ultimately see Britain leave the union, or towards a reconciliation that sets aside the rancour of the night of December 8th-9th. The past few days have seen evidence of both possibilities. 

    First there was the war of words started by French leaders as they openly incited markets and credit-rating agencies against Britain, arguing that perfidious Albion was more deserving of a downgrade than France. For two countries with similar debt levels, Britain has a higher budget deficit and is running higher inflation. The difference is that the Bank of England, unlike the European Central Bank, acts as the lender of last resort to the sovereign, so investors are less worried about losing the face value of their bond.

    The French charge was led by the central-bank governor, Christian Noyer, and quickly followed up by François Fillon, the prime minister, and François Baroin, the finance minister. Even the daily Le Monde seemed surprised by the vehemence of the attack, asking "what has bitten the French government?" The answer, it seems, is the need to prepare the country for the imminent loss of its AAA rating. 

    On the reconciliation side of the ledger is the news that Herman Van Rompuy, who, as president of the European Council, chairs summits, has invited Britain to join the treaty-drafting sessions as an "observer". British officials say that they will even have the right to speak (although not to vote). The readiness to take up the olive branch suggests that Britain recognises it made a mistake in casting a veto. At the same time, several of the countries that had abandoned Britain are now having qualms about the treaty.

    The EU bureaucracy has already produced a working draft of the new treaty. The aim is to have a version ready for a European summit at the end of January or early February, and to complete it in time for signature in March. 

    The arrangement is inelegant: the treaty involves all, or nearly all, of the EU's members, but is separate from the EU's current treaties. Still, this is not the first time such an intergovernmental treaty has been grafted on to the EU. The creation of the Schengen open-border region was originally set up through an intergovernmental treaty. But Schengen was something entirely new. The new euro-zone treaty must somehow amend a substantial body of existing legislation, without formally amending it. "It's a dog's dinner," says one diplomat. 

    The agreement will test the ingenuity of Hubert Legal, the aptly named legal adviser to the Council of Ministers. The French lawyer has already displayed a considerable degree of flexibility that has not been to the liking of all. 

    On the eve of the summit he had told a meeting of sherpas, the envoys of national leaders who were preparing the meeting, that an intergovernmental treaty would be nigh-on impossible. Any change would have to be done with the agreement of all 27 EU members. This oral opinion did much to convince British officials that they had a strong hand with which to demand concessions. 

    But the following night Mr Cameron's fellow leaders decided that they would not grant him a special protocol giving Britain a veto over key aspects of financial regulation. If Britain decided to block a change to the EU treaties, the euro zone would draft a new one, along with anybody else who wanted to participate. Mr Cameron asked Mr Legal to offer a view. To the surprise of many, Mr Legal said that such a roundabout arrangement would be possible after all. The second surprise for Mr Cameron was the alacrity with which all non-euro members announced their readiness to participate. 

    Later on, Mr Legal's close associates defended him from the charge that he had changed his opinion. Not at all, they claim; he had merely told the sherpas that a treaty at 27 was preferable. When the second-best option became the only avenue, he made it clear that there were options to try to make it work. 

    EU treaty negotiations are notoriously arduous, given the need to secure agreement among all member states, and the near-certainty that somebody will refuse to ratify. Ireland, which may be obliged to hold a referendum on the new arrangements, is among those countries arguing that it needs concessions if it is to win ratification.

    So Mr Legal and his team have come up with an innovation: under his draft, the treaty would come into force once nine members of the euro zone (ie, a simple majority) have ratified it. Euro-zone countries that do not ratify it will not be bound by its terms. But like Greece last month after it announced (then cancelled) a plan to hold a referendum, refuseniks would no doubt come under severe political pressure to choose whether they want to stay in or out of the euro. Countries outside the euro zone could voluntarily agree to be bound by the budget strictures of the new treaty. 

    A separate intergovernmental treaty introduces two complications, in particular. 

    First, the aim is to make it harder for politicians to meddle with proposals by the European Commission to place countries under the "excessive deficit procedure", under which they can face sanctions if they run annual deficits higher than 3% of GDP. Under current rules, this requires approval by a qualified (weighted) majority vote (QMV) of member states. The treaty seeks to change this vote to a "reverse QMV" procedure, whereby the proposals are accepted unless a qualified majority of ministers vote against it. How to change this without changing the existing EU treaty? Well, under the terms of the intergovernmental treaty, the minister would agree to behave as if the reverse QMV rule existed. In other words, it is a gentleman's agreement without real enforcement provisions. 

    Another difficulty is the role of the European Court of Justice. Germany wanted profligate states to be forced to account for themselves before the ECJ. Now the court will only have oversight of whether countries have correctly adopted EU-mandated rules on balanced budgets into their constitutions or other legal instruments. Moreover, because the new treaty is only intergovernmental, the European Commission will not be able to sue countries; instead, it will be up to member states to take each other to court, something that does not happen often. 

    The new draft treaty includes a paragraph in the preamble mentioning a separate treaty, on establishing a permanent euro-zone bail-out fund, known as the European Stability Mechanism (ESM). There is no link made in the operative paragraphs. Yet it is a reminder of the bargain that Germany demands of its euro-zone partners: it will stand ready to rescue countries in trouble (up to a point); in exchange, countries must accept far greater budgetary rigour. 

    The ESM treaty, still to be completed after multiple changes (see my post on how it undid last year's Franco-German deal at Deauville), has an interesting peculiarity: it too will enter into force with less than unanimity. But in this case it requires ratification by countries representing 90% of its capital (shared according to the ECB capital key). Moreover, in urgent cases decisions within the ESM can be taken by a majority of 85%. 

    All this sets up not just a two-tier EU (with Britain in the outer edge), but perhaps also a two-tier euro zone. On the current draft, Ireland will not be able to veto the new intergovernmental treaty. But wealthy Germany alone can block the ESM treaty, and can block decisions to grant aid to any country. 

    When in doubt, EU governments and Brussels officials love nothing more than wrangling over the texts of treaties. The question, as ever, is whether it impresses the markets. The answer so far is: no.  

    We should expect 2012 to be even more difficult than 2011. Italy and Spain have large piles of debt to refinance in January; the most creditworthy states of the euro zone could soon start to be downgraded, weakening their already underpowered temporary rescue fund (the European Financial Stabiility Facility); the plan to leverage this fund is deflating like a botched soufflé; and so is the idea of boosting the IMF's resources to help the euro zone.  

    For the euro zone to survive, a long list of things needs to go right—at a time when so much can go wrong. So enjoy the holidays while they last. 

  • Britain and the EU summit

    Europe's great divorce

    Dec 9th 2011, 8:03 by Charlemagne | BRUSSELS

    WE JOURNALISTS are probably too bleary-eyed after a sleepless night to understand the full significance of what has just happened in Brussels. What is clear is that after a long, hard and rancorous negotiation, at about 5am this morning the European Union split in a fundamental way.

    In an effort to stabilise the euro zone, France, Germany and 21 other countries have decided to draft their own treaty to impose more central control over national budgets. Britain and three others have decided to stay out. In the coming weeks, Britain may find itself even more isolated. Sweden, the Czech Republic and Hungary want time to consult their parliaments and political parties before deciding on whether to join the new union-within-the-union.

    So two decades to the day after the Maastricht Treaty was concluded, launching the process towards the single European currency, the EU's tectonic plates have slipped momentously along same the fault line that has always divided itthe English Channel.

    Confronted by the financial crisis, the euro zone is having to integrate more deeply, with a consequent loss of national sovereignty to the EU (or some other central co-ordinating body); Britain, which had secured a formal opt-out from the euro, has decided to let them go their way.

    Whether the agreement does anything to stabilise the euro is moot. The agreement is heavily tilted towards budget discipline and austerity. It does little to generate money in the short term to arrest the run on sovereigns, nor does it provide a longer-term perspective of jointly-issued bonds. Much will depend on how the European Central Bank responds in the coming days and weeks.

    Some doubt remains over whether and how the "euro-plus" zone will have access to EU institutionssuch as the European Commission, which conducts economic assessments and recommends action, and the European Court of Justice, which Germany hopes will ensure countries adopt proper balanced-budget rulesover Britain's objections.

    But especially for France, on the brink of losing its AAA credit rating and now the junior partner to Germany, this is a famous political victory. President Nicolas Sarkozy had long favoured the creation of a smaller, "core" euro zone, without the awkward British, Scandinavians and eastern Europeans that generally pursue more liberal, market-oriented policies. And he has wanted the core run on an inter-governmental basis, ie by leaders rather than by supranational European institutions. This would allow France, and Mr Sarkozy in particular, to maximise its impact.

    Mr Sarkozy made substantial progress on both fronts. The president tried not to gloat when he emerged at 5am to explain that an agreement endorsed by all 27 members of the EU had proved impossible because of British obstruction. “You cannot have an opt-out and then ask to participate in all the discussion about the euro that you did not want to have, and which you also criticised,” declared the French president.

    With the entry next year of Croatia, which will sign its accession treaty today, the EU is still growing, said Mr Sarkozy. “The bigger Europe is, the less integrated it can be. That is an obvious truth.”

    For Britain the benefit of the bargain in Brussels is far from clear. It took a good half-hour after the end of Mr Sarkozy's appearance for Mr Cameron to emerge and explain his action. The prime minister claimed he had taken a “tough decision but the right one” for British interestsparticularly for its financial-services industry. In return for his agreement to change the EU treaties, Mr Cameron had wanted a number of safeguards for Britain. When he did not get them, he used his veto.

    After much studied vagueness on his part about Britain's objectives, Mr Cameron's demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here). The British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of its French single-market commissioner, Michel Barnier. And yet strangely, given the accusation that Brussels was taking aim at the heart of the British economy, almost all of the new rules issued so far have been passed with British approval (albeit after much bitter backroom fighting). Tactically, too, it seemed odd to make a stand in defence of the financiers that politicians, both in Britain and across the rest of European, prefer to denounce.

    Mr Cameron said he is “relaxed” about the separation. The EU has always been about multiple speeds; he was glad Britain had stayed out of the euro and out of the passport-free Schengen area. He said that life in the EU, particularly the single market, will continue as normal. “We wish them well as we want the euro zone to sort out its problems, to achieve stability and growth that all of Europe needs.” The drawn faces of senior officials seemed to say otherwise.

    The 23 members of the new pact, if they act as a block, can outvote Britain. They are divided among themselves, of course. But their habit of working together and cutting deals will, inevitably, begin to weigh against Britain over time.

    Mr Sarkozy and Angela Merkel, the German chancellor, have given notice of their desire for the euro zone to act in all the domains that would normally be the remit of all 27 membersfor example, labour-market regulations and the corporate-tax base.

    Britain may assume it will benefit from extra business for the City, should the euro zone ever pass a financial-transaction tax. But what if the new club starts imposing financial regulations among the 17 euro-zone members, or the 23 members of the euro-plus pact? That could begin to force euro-denominated transactions into the euro zone, say Paris or Frankfurt. Britain would, surely, have had more influence had the countries of the euro zone remained under an EU-wide system.

    It says much about the dire state of the debate on Europe within Britain's Conservative party that, as Mr Cameron set out to Brussels, another Tory MP portentously invoked the memory of Neville Chamberlain, who infamously came back from Munich with empty assurances from Adolf Hitler. Mr Cameron may have made a grievous mistake with regard to Britain's long-term interest. But at least nobody can accuse him of returning from Brussels with a piece of paper in his hand.

    (Picture credit: AFP)

    Read more: Bagehot's take on Britain falling out of the EU

  • The EU summit

    Pope Mario in the euro-bordello

    Dec 9th 2011, 2:05 by Charlemagne | BRUSSELS

    AT LEAST there is hope. Grim-faced European leaders gathered in Brussels on December 8th for their summit to save the euro with the news that Pope Benedict XVI was praying to the Virgin Mary for the sake of Italy and Europe. He should also spare a prayer for Mario Draghi, the president of the European Central Bank.

    As the dinnertime negotiations stretched into the wee hours of Friday morning, leaked drafts of a communiqué indicate that the summiteers intend to agree to a “fiscal compact” to ensure the stability of the euro zone. These words matter: they are the same ones that Mr Draghi had used a few days earlier in a Delphic judgment that many interpreted to mean that he would intervene more heavily in the bond markets, once the politicians had delivered a more credible system to impose budget discipline.

    The leaders seemed to be appealing directly to Mr Draghi to deploy the “big bazooka”, which only he controls, to protect big and vulnerable sovereigns like Italy and Spain. So is salvation at hand? Not quite.

    Even before the summit had started, Mr Draghi punctured the bubble of optimism that his words had created. He had been misinterpreted, he said. Mr Draghi "was surprised by the implicit meaning that was given” to what he had said.

    He also popped what had been another emerging reason for hope: that the ECB, or individual central banks, might lend money directly to the IMF so it could lend back to European states. “It's legally complex. The spirit of the treaty is that one cannot channel money in a way to circumvent the treaty provisions. If the IMF were to use this money exclusively to buy bonds in the euro area, we think it's not compatible with the treaty.” Markets quickly deflated.

    Senior European officials suggest that Mr Draghi was just playing coyperhaps because he is still new, or perhaps because he is Italian, or perhaps because he wants to hold the leaders’ feet to the fire.

    To judge from the latest draftparts of which are likely to be rewrittenthe compact being negotiated broadly follows the lines agreed by President Nicolas Sarkozy of France and Angela Merkel, the German chancellor.

    — Governments should adopt a fiscal rule to balance their budgets over an economic cycle, though they could incur deficits “in the event of exceptional circumstances”.

    — Specifically, the structural deficit should not exceed 0.5% of nominal GDP. Countries with debt “significantly lower” than 60% of GDP could run higher deficits.

    — Such a “golden rule” should be enshrined in national constitutions or other legislation. The European Court of Justice will have the power to verify whether the rule is properly transposed.

    — Countries breaching the 3% deficit limit imposed under the existing Stability and Growth Pact will face “automatic consequences” unless ministers block action by a qualified or weighted majority (this is known to Brusselistas as “reverse QMV”). That said, “exceptional circumstances will be taken into account”.

    Where the draft communiqué pulls away from the “Merkozy” script is in its attempt to open the door to Eurobonds:

     …the possibility of moving towards common debt issuance in the longer term and in a staged and criteria-based process should be considered, once significant progress has been made in reinforcing fiscal rules and discipline. Any steps towards that end will have to be commensurate with a robust framework for budgetary discipline and economic competitiveness to avoid moral hazard and foster responsibility and compliance.

    Another point that upsets the Germans is the idea that the European Stability Mechanism, the permanent euro-zone bailout fund that will replace the European Financial Stability Facility, should “have the possibility to directly recapitalise banking institutions and to have itself the necessary features of a credit institution”. In other words, it should become a bank, which would allow it to borrow from the ECB. This would be an indirect means of using the “big bazooka”.

    These points are likely to be excised, or heavily rewritten, by the end of the summit. Moreover the paperwork leaked so far says nothing about the biggest underlying issue. Will the required changes to the euro zone's treaties be brought about with the agreement of all the EU's 27 members, or will the euro zone set off on a path of separation, by drawing up its own treaty? My column this week looks at the role that Britain, in particular, will play in determining the outcome. The word last night was that Mr Cameron was being "very tough". But when have his officials ever described their prime minister as a wimp?

    In the short term the markets will not really care what legal instruments are used, or what diplomatic phrases are negotiated. The crucial thing will be whether the leaders have produced what Mr Draghi needs to act.

    So leaders are performing a peculiar ritual to win the favour of the ECB president. If countries mortify themselves sufficiently, then perhaps Mr Draghi will smile upon them. Word has it that Mrs Merkel would not mind a greater role for the ECB, but it should not be funding governments too overtly, and it should not be told by their leaders what to do. This all to preserve the hallowed independence of the ECB.

    France and Germany disagree bitterly about the ECB's involvement in the crisis. They have now agreed to keep silent; the less said about it, the better. If Mr Draghi were indeed to intervene, he should be seen to do so independently, not under duress.

    And yet there is something incongruous about this idea that Mr Draghi should be kept pure and unsullied by worldly politics, concerned only with the celestial mysticism of monetary policy. If that were so, then why is he, like his predecessor Jean-Claude Trichet, attending a European summit where the grubbiest of political intercourse takes place? It is like having the pope come round to preach in a brothel.

    (Picture credit: AFP)

  • Germany, France and the euro

    Behind the smiles

    Dec 5th 2011, 18:57 by Charlemagne | BRUSSELS

    ANGELA MERKEL and Nicolas Sarkozy have come a long way since their walk along the seafront at Deauville in October last year. That meeting produced a compromise that, some hoped, held the promise of resolving the euro zone’s debt crisis.

    That deal envisaged tougher monitoring of countries’ budgets and economic policies, and a rapid amendment to the European Union's treaties. Many thought treaty change was unnecessary but went along for Mrs Merkel's sake.

    Sounds familiar, no? That is because, a year on, “Merkozy”, as the Germano-French duo are now known, are once again pushing for a toughening-up of controls on national budgets and yet another revision to the treaties.

    At a summit in Paris today the two leaders announced they would “force-march” the euro zone towards stricter rules to ensure that a debt crisis could never happen again. They will submit proposals for a new treaty on Wednesday and, if they cannot secure agreement from all 27 EU members, they declared they were ready to push ahead with a separate agreement among the 17 members of the euro zone. That risks isolating Britain, as well as the nine other non-euro states.

    Treaty change is no more popular than it was in Deauville, not even among euro-zone members. But at a summit of European leaders in Brussels starting on Thursday the chances are that some form of treaty revision will grudgingly be agreed, because Mrs Merkel wants it so badly.

    But in many ways, the new proposals undo the bargain at Deauville, which, many think, helped worsen the crisis. Since then Ireland and Portugal have been bailed out; Greece has sought a second rescue programme; contagion has spread to Italy and Spain; and the prime ministers of Italy and Greece have been replaced by technocrats.

  • The euro crisis

    One problem, two visions (part II)

    Dec 2nd 2011, 22:10

    THE two speeches in two days by Nicolas Sarkozy and Angela Merkel reveal the many differences between them ahead of next week's European summit. I give a brief analysis in my earlier post. What follows is a more detailed exegesis (a link to Sarkozy's speech in French is here and a PDF Merkel's address in German is here):

    Sarkonomics and the origin of the crisis

    The French president offers a strange bit of Sarkonomics to explain that the crisis was caused by external forces – the unregulated globalisation of trade and finance – of which France is essentially a victim.

    Financial globalisation established itself to compensate artificially the ravages that [trade] liberalisation without rules caused in the economies of developed countries. It was necessary so that the surplus of some could finance the deficits of others. It was necessary so that debt could compensate for the unacceptable fall in living standards of households in developed countries. It was necessary to finance a social model that was crumbling beneath deficits. It was ineluctable so that financial capital could seek elsewhere the profits that it could no longer hope to gain in developed countries. Thus was established a gigantic machine to create debt.

    Mr Sarkozy says France cannot be blamed for the troubles it faces because other rich countries are in trouble too; yet he does not explain why some developed countries (Germany and several Nordic states, for example) have survived the crisis better than France despite the infernal debt machine. Later on, Mr Sarkozy says France has to cut back on state expenditure to preserve its destiny (this was tricky for him, as he had vowed three years earlier in Toulon not to conduct a policy of auterity)

    Mrs Merkel, for her part, does not speak much of great uncontrollable forces unleashed by laissez-faire capitalism. Instead she emphasises the responsibility of individual states. The problem, in her view, is that countries have broken fiscal rules, and there has been nobody to enforce the limits on deficits and debt.

  • The euro crisis

    One problem, two visions (part I)

    Dec 2nd 2011, 19:06 by Charlemagne | BRUSSELS

    IT SEEMS odd, at first sight, to see the markets taking so much hope from two speeches in two days - one by France's President Nicolas Sarkozy and the other by Germany's Chancellor Angela Merkel - that revealed more differences than agreement on how to resolve the euro zone's debt crisis.

    Perhaps it is the fact that both say the European Union's treaties should be changed, and any agreement on any subject is good news. Or perhaps it is the hope that, whatever they say in their opening bids, they will come up with enough of a deal at the next European summit on December 8th-9th to allow the European Central Bank to deploy its “big bazooka”.

    Then again, markets have often rallied ahead of summits in the expectation of an agreement, only to be disappointed within days, or even hours, of the latest half-step being announced.

    Neither Mr Sarkozy nor Mrs Merkel offered any real detail of what should be included in a revision of the treaties. But even their vague outlines reveal contrasting philosophies. I give a fuller analysis of the speeches in the next post (here). In summary:

    - Mr Sarkozy places the emphasis on “solidarity” among European states (ie, joint Eurobonds, and no defaults or debt-restructuring after Greece), while Mrs Merkel gives priority to budgetary discipline and rules.

    - Mr Sarkozy urges the European Central Bank to act; Mrs Merkel is jealous of guarding its independence

    - Mr Sarkozy wants to create a hard core of euro-zone countries within the European Union; Mr Merkel wants to include as many non-euro states as possible 

    - Mr Sarkozy wants to Europe to integrate through the action of leaders (reproducing France's presidential system, with lots of discretion for the executive); Mrs Merkel favours more independent institutions like the European Commission and the European Court of Justice (more akin to Germany's federal structure, which retricts politicians' leeway)

  • The future of the EU

    Two-speed Europe, or two Europes?

    Nov 10th 2011, 2:23 by Charlemagne | BRUSSELS

    NICOLAS Sarkozy is causing a big stir after calling on November 8th for a two-speed Europe: a “federal” core of the 17 members of the euro zone, with a looser “confederal” outer band of the ten non-euro members. He made the comments during a debate with students at the University of Strasbourg. The key passage is below (video here, starting near the 63-minute mark)

    You cannot make a single currency without economic convergence and economic integration. It's impossible. But on the contrary, one cannot plead for federalism and at the same time for the enlargement of Europe. It's impossible. There's a contradiction. We are 27. We will obviously have to open up to the Balkans. We will be 32, 33 or 34. I imagine that nobody thinks that federalismtotal integrationis possible at 33, 34, 35 countries.

    So what one we do? To begin with, frankly, the single currency is a wonderful idea, but it was strange to create it without asking oneself the question of its governance, and without asking oneself about economic convergence. Honestly, it's nice to have a vision, but there are details that are missing: we made a currency, but we kept fiscal systems and economic systems that not only were not converging, but were diverging. And not only did we make a single currency without convergence, but we tried to undo the rules of the pact. It cannot work.

    There will not be a single currency without greater economic integration and convergence. That is certain. And that is where we are going. Must one have the same rules for the 27? No. Absolutely not [...] In the end, clearly, there will be two European gears: one gear towards more integration in the euro zone and a gear that is more confederal in the European Union.

  • The IMF, America and the euro

    Sympathy, but no money

    Nov 4th 2011, 20:19

    "THE IMF will never be big enough to save the euro zone.” That is how one IMF official dismissed the idea that the fund would help put up a firewall to protect the euro zone. It could help, obviously, but in the end salvation was for the euro zone to figure out for itself.

    With Greece potentially facing a default and exit from the euro in the coming weeks, euro-zone countries have been working to build up their rescue fund, known as the European Financial Stability Facility, though financial engineering that might expand it to about €1 trillion. But without the full power of the European Central Bank, which is not allowed to lend to states, this is not enough to save a country like Italy, should it collapse in the bond markets (see my previous post)

  • Italy under IMF supervision

    Berlusconi burlesque

    Nov 4th 2011, 19:33 by Charlemagne

    FIRST Greece. Next Italy? Troubled euro-zone countries get bail-out money with conditions and strict monitoring by the International Monetary Fund (IMF). But at the G20 summit that concluded in Cannes today, the troubled euro zone got no more money (more on this in my next post), and Italy was placed under IMF monitoring.

    Though yields on its bonds have soared alarmingly, Italy has not had to seek a bail-out (not yet anyway). And in an attempt to ensure it does not succumb, bringing down the euro with it, it has been placed under a special preventive regime—placed on probation to ensure it implements the many promises it made to carry out reforms designed to promote growth and balance the budget by 2013.

  • The euro's Frankfurt Group

    A crisis? Call the F-team

    Nov 4th 2011, 11:31 by The Economist | Cannes

    SOME European delegates walking around the G20 summit in Cannes can be seen sporting an unusual badge: Groupe de Francfort.

    The Frankfurt Group, or GdF for short, is the latest addition to the proliferation of international political groups, the G7, G8 and the G20, among many. Consisting of the leaders of Germany, France, the Eurogroup of finance ministers, the European Central Bank, the European Commission and the International Monetary Fund, the F-team has quickly established itself as the cluster managing the euro’s crisis. It has no legal structure or secretariat, but it is now the core within Europe’s core.

  • Preparing for default

    Quick! More sandbags (filled with cash)

    Nov 4th 2011, 1:18 by The Economist | Cannes

    THE BEACHFRONT of Cannes is deserted. The streets are still. The city is quiet, apart from the rumbling of journalists pulling their rolling bags and motorcades whisking G20 leaders to and from their hotels.

    One can almost hear the scraping of shovels as European leaders rushed to fill the sandbags in the hope of surviving the impending explosion in Greece, perhaps followed by Italy (see earlier post).

  • The G20 and the euro's crisis

    The burning fuse

    Nov 4th 2011, 0:51 by The Economist | Cannes

    FOR MOST of the first day of the G20 summit in Cannes, the world’s most important leaders have been mere spectators to the political drama in Athens that could determine the fate of the euro zone, and of the world economy.

    Forget the financial-transaction tax. Forget the regulation of commodity prices. Forget the call to ensure that the world’s poorest do not suffer twice, once because of their wretchedness and twice because rich-world aid budgets are cut. These things and more will be mentioned in the final communiqué. The most burning issue is the fate of the euro.

  • Italy and the euro zone

    Shall I kill him?

    Oct 24th 2011, 0:33 by The Economist | BRUSSELS

    “I HAVE never failed to make the grade,” says Silvio Berlusconi after being summoned before headmasters of the euro zone for a beating. “I was convincing.”

    But Angela Merkel of Germany and Nicolas Sarkozy of France thought differently. When asked whether Italy's prime minister had reassured them about doing his homework to draw up a plan to bring down Italy's vast debt and implement structural reforms, Mrs Merkel and Mr Sarkozy first hesitated, then looked at each other and, finally, smirked knowingly. (video clip here, in French)

    “How to put it?” started Mr Sarkozy, “We have confidence in the sense of responsibility of all of Italy's political, financial and economic authorities.” Mrs Merkel chipped in: “It was a meeting among friends.”

    It was anything but friendly. Rarely has a member of the euro zone—and a founding member of the European integration project, no less—been chastised so publicly. But in many ways, the euro-zone debt crisis is now all about Italy.

    In discussions all weekend, including at two European summits, leaders worked on drawing up a package deal to save the euro that should be concluded in another round of summits on Wednesday.

    All three of the main issues—the fate of Greece, the “firewall" to prevent contagion and the recapitalisation of Europe' banks—revolved in some ways around Italy: if Greece's debt is restructured, will the markets then turn on Italy, the next most-indebted state in the euro zone? If so, is the new firewall big enough to protect Italy? And does the plan to strengthen banks with fresh capital, so that they can withstand the loss of value of their bond holdings, not place an unfair burden on Italy, whose banks hold vast amounts of depreciated Italian debt?

    Earlier this summer, when Italian bonds started to collapse, the European Central Bank (ECB) had quietly told Mr Berlusconi to push through reforms in exchange for the ECB' intervention to buy Italian bonds, so holding down Italy's borrowing costs. But once the most acute market pressure was relieved, Mr Berlusconi began to backtrack on his austerity measures, to the fury of Germany.

    At the summit, Mr Berlusconi was told bluntly to go away and come back in three days' time with a credible plan to reform his country. “There is no question of appealing for solidarity from partners if those whom we assist do not themselves make the efforts necessary” declared Mr Sarkozy.

    Herman Van Rompuy, president of the European Council (who presided over the summits), later repeated the point, saying “certain countries” had to make “commitments” about future reform. Or else, what? asked journalists. “They WILL make commitments,” replied Mr Van Rompuy, curtly.

    The Italian prime minister, through, is unrepentant. Like every practiced school miscreant, he has an excuse for everything.

    No structural reforms? His partners in the Northern League prevented a reform of pensions. Now he would urge the league's boss, Umberto Bossi, to abide by proposals to have a uniform retirement age of 67 across the euro zone.

    Was Mr Sarkozy not furious with Italy? Well, the French president's attitude to Italy was coloured by his understandable annoyance about the allocation of seats at the ECB. Having supported an Italian, Mario Draghi, to succeed Jean-Claude Trichet as the bank's president, France had demanded that the Italian member of the ECB's six-man executive board, Lorenzo Bini-Smaghi, should step down early to make way for a Frenchman. But Mr Bini-Smaghi had declined to listen to pleas to avoid a casus belli between Italy and France, despite the offer of prestigious jobs back home (though not the job he wanted, ie, to become governor of the Bank of Italy).

    “Sarkozy was annoyed,” admitted Mr Berlusconi. “There has been a clash on this question of Bini-Smaghi, for which I bear no responsibility. At a certain point I told him [Sarkozy]: 'What can I do? Shall I kill him? I don't think so.'”

    Mr Berlusconi is always great with the one-liners. But his buffoonery is wearing thin on the rest of the euro zone.

  • Two-speed Europe

    Sarko and Dave: united in Libya, at war in Europe

    Oct 23rd 2011, 19:08 by The Economist | Brussels

    IN A decade’s time, perhaps, the twin European summits on October 23rd may come to be seen as the moment when the 17 countries of the euro zone started to break away from the 10 non-euro states.

    It is always hard to define the precise moment when an big and complex process has started. But today would be a good candidate. This is not just because the summit of the 27 members of the European Union is being followed by a separate meeting of the 17. This has happened before, after all.

    But the long and bad-tempered lunch that separated the two summits in Brussels - with France's Nicolas Sarkozy and Britaoin's David Cameron as the main protagonists of the acrimony, even though they have just won a war in Libya - indicates that both the euro's “ins” and its “outs” are aware that their relationship is changing in a fundamental way.

    I explore several of the issues of a two-speed, two belief Europe in my column this week (Wake up, euro zone). Several factors combine to bring all this to a head.

    1. The markets are testing to destruction the ambiguity of a monetary union with disparate national fiscal and economic policies. In aggregate terms the EU’s deficit and debt rations are in better shape than, say, those of the United States. But the EU is not a federal state, and the markets sense that the euro zone is reluctant to stand fully behind its weakest members.

    2. Nicolas Sarkozy has secured Germany’s support to hold regular meetings of euro-zone leaders. They will be presided over by Herman Van Rompuy, president of the European Council (who chairs summits at 27),  but the euro-zone leaders reserved the right to choose someone else where Mr Van Rompuy’s term expires. Even if integration goes no further, the habit of the 17 working together will be felt across the EU.

    3. Angela Merkel, the German chancellor, is pushing hard for re-opening the EU’s treaties. The EU has already done this once to create a permanent bail-out system (it has not yet been ratified). Now it wants to do so again to impose greater fiscal and economic discipline on states that use the euro. The euro zone has adopted several new tools to monitor and co-ordinate economic policies. But having bailed out three peripheral states, and with the prospect of big economies like Italy collapsing, Germany and the other creditor states want even stronger treaty-based powers – for example the ability of taking a profligate state to the European Court of Justice.

    4. David Cameron faces an increasingly emotive domestic debate on Europe. He is resisting demands from eurosceptics for a referendum on Britain’s membership of the European Union. But the prospect of opening the treaties makes it harder to ignore pressure to seize the moment to redraw Britain’s relationship with the EU or, indeed, to withdraw from the union altogether. Having encouraged the euro zone to integrate to save itself, Britain is now looking for “safeguards” to ensure it does not stray too far.

    All these issues mean that European leaders spent the best part of two hours over lunch debating the interplay between the 17 and the 27. Should the ins meet first, followed by the outs? Or should it be the other way around?

    On Wednesday 26th, when the euro zone holds the second session of its two-part summit, the EU’s 27 leaders will make a point of gathering beforehand. The meeting will last just an hour, and will sign off on the plan to recapitalise Europe’s banks. But because the financial sector is part of the single market, which is an issue for all EU states, and Mr Cameron wanted to make sure that the 27 were seen to take the decision, not the 17.

    For now, Mr Cameron does not appear to have a very strong hand. Most of the other euro-outs are committed, legally and politically, eventually to joining the single currency. Mr Sarkozy’s harsh words to Mr Cameron were strikingly spiteful: We are sick of you criticising us and telling us what to do. You say that you hate the euro and now you want to interfere in our meetings.

    British officials shrug off Mr Sarkozy’s legendary rudeness as a personality flaw. “He never pursues it. He is not interested in texts,” says one diplomat.

    This is not quite true. In the final conclusions, Britain was unable to secure strong language to safeguard the interests of non-euro states. Britain had proposed a reference to the need to develop “concrete and effective mechanisms to ensure that the integrity of the internal market at 27 is fully preserved and that the interests, including essential economic interests, of the non participating member states is fully protected”. Instead, the task of safeguarding the interests of the outs was left to the European Commission, the EU's civil service

    Despite the resistance of most European leaders, Mrs Merkel secured a specific commitment to “exploring the possibility of limited treaty changes”, to be discussed in December following a report by Mr Van Rompuy.

    Later on, Mr Van Rompuy explained:

    It is normal that those who share a common currency must take some common decisions relating to that currency. In fact, one of the origins of the current crisis is that almost everybody has underestimated the extent to which the economies of the eurozone are linked; and we are now remediating that. However, it is vitally important to safeguard the integrity of the single market among the 27. It gives the union cohesion and is the very basis of our prosperity. So we must keep the links between the two types of decision-making as close as possible, in a spirit of trust. And that's why we decided today that the 27 leaders will also meet before Wednesday's follow-up euro summit.

    Mr Cameron said the last treaty revision, to create the permanent European Stability Mechanism, had allowed Britain to extricate itself from contributing to the bail-out of Greece and others.

    Those countries in the eurozone that see the need for greater integration recognise that it may be necessary to have treaty change as well as other measures to integrate their economies. Treaty change in the future may well present a good opportunity for Britain. The last treaty change which was to create the European Stability Mechanism gave us in Britain the opportunity to get out of the bailout funds for the eurozone. So we exacted a good price for that treaty change [...] We shouldn’t get ahead of ourselves, the idea of the possibility of treaty change has to go back to the European Council, then you have to have a convention, then you’ve got to consult the European parliament, then, then, then… This process can take years.

    Turning to his backbenchers, he said a referendum would be a distraction – not just from the need to deal with the crisis, but from the opportunity to exploit a chance to renegotiate Britain’s status.

    I don’t think this is the right time to legislate for an in/out referendum. This is the right time to sort out the eurozone’s problems, defend your national interest and look to the opportunities there may be in the future to repatriate powers back to Britain. Obviously the idea of some limited treaty change in the future might give us that opportunity….We must not get overexcited about this but any treaty change in the future does give you the opportunity to advance your interests which of course I would want to do.

  • The euro crisis

    Death of a summit

    Oct 20th 2011, 23:00

    THE big blanks left in the draft of the euro summit communiqué that was doing the rounds on October 20th said it all. (PDF is here)

    Amid the self-congratulatory verbiage about how the euro zone had taken “unprecedented steps to combat the effects of the worldwide financial crisis”, the document was silent on all the most important elements of the much-promised “comprehensive solution” to the euro's debt crisis: how to strengthen monitoring of Greece's derailing adjustment programme; how much of a haircut to impose on private holders of Greek debt; how to boost the power of the bail-out fund to protect Spain and Italy; and how to recapitalise Europe's most fragile banks.

    These voids were due to be filled in a weekend marathon of meetings in Brussels. Finance ministers would gather on October 21st and 22nd. Then the leaders would hold twin summits on October 23rd, first of all the European Union's 27 members, followed by a gathering of the 17 leaders of the euro zone. At the end of it all there would be, as Nicolas Sarkozy and Angela Merkel promised in Berlin a fortnight earlier, a “global package” that would prove to the world that the euro zone could deal with its problems.

    “You should know that France and Germany have perfectly common positions on all the issues,” Mr Sarkozy had declared at the time, comically refusing to give any detail of what that the accord consisted of. (Transcript here, in French)

    The disagreement between the French president and the German chancellor became ever more apparent as the days went by. Mrs Merkel started to play down the prospect of a comprehensive resolution of the crisis, saying there would be no magic wand. A rushed visit by Mr Sarkozy to Frankfurt to meet Mrs Merkel and other key figures, apparently leaving his wife, Carla Bruni, to give birth to their baby daughter on her own, does not seem to have unblocked the positions.

    On October 20th, the climate of discord seemed to grip even the troika of technical experts assessing the Greek programme. Reports emerged of disagreement between the IMF and the European Commission over their estimates of Greece's ability to bring down its debt; the IMF thinks the commission is being too optimistic. A draft of the troika's report (PDF is here) spoke of the country's debt dynamics being “extremely worrying”. But the key section in the report setting out the figures was left blank.

    Reports started circulating of the Franco-German disagreement being so bad that the summit might have to be delayed. This was quickly denied. But asked whether there might have to be an additional summit next week, a senior EU official said vaguely: “Is there life after death?”

    Yes there is, at least when it comes to euro-zone summits. As the summit of October 23rd gives up the ghost, another one is already being born. A statement (Word file is here), from the Elysée Palace said the French and German leaders were determined to draw up “a global and ambitious solution” to the crisis. After a “deep examination” of the issues on the 23rd, the statement said, there would be a new summit to be held by October 26th, at the latest.

    The charitable view of the mess is that Mrs Merkel needs time to consult the Bundestag on changes to the bail-out fund. Moreover, given the poor state of Greece's reform programme, more time is needed to negotiate with Greece's private sector a greater reduction of its debt than agreed in July. The cynical view is that there is a perfect disagreement between Paris and Berlin. Details of the latest state of play are summed up here. In short, the summit to resolve the crisis is, itself, in crisis.

     

    Correction: This blog post briefly, and mistakenly, referred to "London" rather than "Berlin" in the last paragraph.

  • The euro crisis

    Carla, Europa and the fable of two births

    Oct 19th 2011, 23:07 by The Economist | BRUSSELS

    NICOLAS Sarkozy attended two births today. The first, in Paris, concluded happily when his wife, Carla Bruni, brought into the world a baby girl. She is the French president's fourth child, and the second for his spouse. The infant's name has not been confirmed.

    Mr Sarkozy then flew to Frankfurt to attend another parturition. The mother is called Europa, nicknamed euro. And we already know the name of her bundle: Comprehensive Solution. It is the third such offspring this year, and the latest labour promises to be the hardest. There is every sign that the babe, if it is not still-born, will be a disappointing runt.

    While baby Sarkozy's arrival happened discreetly, there were lots of relatives on hand to wait for Comprehensive Solution. Europa's labour coincided with the retirement ceremony of a favourite uncle, Jean-Claude Trichet, who does something in banking and offered a few cautionary words about necessity being the mother of procreation. Given the risky birth, everybody left the party in silence. But the relatives will gather again in Brussels tomorrow, and the day after tomorrow and the day after that for a great family Council.

    The godmother, Angela Merkel, has already told the world to expect a sickly, cursed child: “All of the sins of omission and commission of the past cannot be undone by waving a magic wand.... This is going to be a long and arduous road.”

    The birth of Comprehensive Solution involves a delicate operation to remove a putrid boil in Europa's nether regions. The condition is called “Greek debt” and the euphemism for the medical procedure to excise it is “applying a haircut”. It is more like amputation. And not even the financial doctors know if it will stop the infection, or cause it to spread throughout Europa's body.

    It was only a few days ago that Nicolas and Angela had promised the world the birth of a Saviour, who would protect Europa from the wild bond-raiders come from the forests.

    But the more the experts have studied foetus, the more it seemed to be not quite right. It was supposed to develop two strong legs, with €2 trillion worth of muscle, to hold up Europa. But now it looks like it will have no more than €1 trillion, ie, one leg.

    And Comprehensive Solution was supposed to have two strong hands (to hold the purses of Europa's bankers). These were reckoned to weigh in at €200 billion. But further inspection puts them at less than €100 billion, ie, barely one hand. Having indulged in fiscal promiscuousness well into adulthood, old Europa lacks the strength to bring forth a healthy child.

    Nicolas still hopes for a miracle. He is back in Paris with Carla and the baby girl. But he knows his family's fate depends on the survival of Comprehensive Solution.

    Come the family Council in Brussels on Sunday, everybody will sing the praises of Comprehensive Solution. But word of its horrible condition is spreading through the souks, where traders see it as a bad omen. And through the gloom of the forest, one can already catch the glint of the bond-raiders sharpening their swords.

  • EU foreign policy

    Meanwhile on planet Brussels

    Oct 18th 2011, 20:20 by The Economist | BRUSSELS

    WITH the euro zone sinking deeper into crisis – now France is threatened with a downgrade of its AAA credit rating – you might think that everybody in Brussels would be dedicating every waking hour to averting the looming catastrophe.

    But just days before the EU’s summit on October 23rd , the permanent representatives of the EU’s 27 member-states in Brussels are devoting an almost obscene amount of time to their old pastime: theological disputes over the balance of power within the EU.

    The latest version of this game is the question of how and by whom the European Union is represented in international bodies: what are the roles and prerogatives of EU bodies and national governments in all manner of international discussions.

    Welcome to the parallel universe of planet Brussels.

    So far 85 joint statements have been blocked at the United Nations, the Organisation for Security and Co-operation in Europe and the Council of Europe. The myriad subjects range from nuclear disarmament to the rights of the child, the rights of indigenous people, financial reform of the UN, the status of the Roma, economic development in Africa, resistance of germs to antimicrobial drugs and much more besides.

    At issue is a disagreement over who should speak on a particular subject – the member-states, the European External Action Service (EEAS, the EU’s newish “foreign ministry”) or the European Commission (the EU’s civil service)? And on whose behalf should they claim to speak – the member states collectively, the EU as a whole, or just as a particular body, eg, the Commission?

    These matters were supposed to have been settled in the 2009 Lisbon treaty, which created the EEAS. But there are many grey areas of shared competence. These are being contested by the Commission on the one hand, and by the British on the other. The problem dates back to the Lisbon treaty, but has become acute since May, when Britain’s Foreign Office publicly gave warning that it would resist any attempt by EU bodies to encroach on British rights in foreign policy. More often than not in the long discussions at COREPER, the committee of permanent representatives, the British have been outnumbered 26:1.

    Pierre Vimont, one of the most senior EEAS officials, has expressed his frustration at such pedantry. As he told the annual dinner earlier this month for the Friends of Europe, a Brussels-based think-tank, the burning issue has been whether “we should pronounce statements on behalf of’ ‘the EU’, or ‘the EU and its member-states’."

    Old hands in the EU will note that, in a system where power only ever seems to flow towards Brussels, the frontier between national and shared competence will inevitably be guarded vigilantly. Britain's Tories, in particular, never liked the idea of giving the EU an enhanced role in foreign policy; most others would dearly like the EU to speak with greater authority, so want to see it taking more of the stage. As one (non-British) national envoy notes despairingly: “Other countries laugh at us. They can’t believe the Europeans have gone back to institutional bickering.”

    All this should act as a warning for the current discussions on reforming euro-zone governance. France would like to create new inter-governmental institutions to run the euro zone. Germany wants to re-open the treaties to give Brussels more authority over national budgets. But as the foreign policy dispute shows, any change to the balance of power is bound to be challenged, could cause paralysis - and may worsen the problem you are trying to solve.

  • Cybersecurity in America and Europe

    Freedom and security in cyberspace

    Oct 6th 2011, 0:24 by The Economist | BRUSSELS

    THIS is a long post, and a diversion from my usual EU- and euro-related concerns. But until recently I was writing about cybersecurity, and it does matter to the security of Europe, as the cyberattacks on Estonia in 2007 demonstrate. So here goes...

    Later today (Thursday) Britain's foreign secretary, William Hague, will take questions from the public via Twitter on the London conference on cyberspace that he is organising for next month. As a journalist, I cannot help but feel that this a bit of a stunt: communicating in 140 remotely typed characters, the questioner has little chance of putting a politician on the spot. Still, I suppose one should not criticise ministers for trying to communicate with the public.

    The subject is serious, however. More and more people and devices are being hooked up to the internet. One debate concerns the future governance of the internet: should it be directed by governments, or should it be left to the private sector to develop inventively (and somewhat anarchically)? The Economist recently ran an account of the debate (here) and expressed its view in a leader (here). To judge from Mr Hague's tweets, he agrees with us.

    Inevitably, given the pervasiveness of information technology, cyberspace is also becoming a question of security. After land, sea, air and space, cyberspace is now the fifth dimension of warfare. Could a country launch a crippling attack from cyberspace, say to knock out the electricity grid of a rival state, or snarl up the logistical chain of its armed forces? The answer is: maybe.

    For those that want to get up to speed, a good place to start is my Economist cover story on cyberwar last year (here), and the accompanying leader (here).

    In America, especially, cyberspace is rising up the scale of national-security threats. Britain, too, is tooling up for defence (and offence) in and through cyberspace. In the rest of Europe the debate perhaps centres more on questions of data privacy. On all sides of the Atlantic, however, cybercrime is endemic.

    A Google News search for “cyber attack” throws up recent news of a threat by hackers to knock out the New York Stock Exchange on October 10th, a report on a new centre to defend America's critical infrastructure, speculation about the cause of the failure of Bank of America's online banking service, and demands by Congress for America to respond firmly to “predatory” cyberespionage by China.

    Ahead of the London conference, the Ditchley Foundation in Britain gathered senior officials, industry experts and NGOs at its Oxfordshire retreat to discuss how best to balance the benefits of an open internet with the need for action to protect the electronic commons. I was asked to sum up the debate. These were my thoughts, tidied up and edited where necessary for clarity and discretion:

    THE words of one senior participant still resonate: "It's so big it does my head in." At every turn this weekend, we have run into the problem of definitions: what is it that we are dealing with? It is not because cyberspace it is distant or foreign, but because it is all around us and we are part of it.

    As with the Supreme Being, we can only talk about it in metaphors. Some have invoked the language of nuclear deterrence, others of biological weapons, others have spoken of crime, others of public health. Some talk of the Law of the Sea. One breakout group reports: "We are in a swamp where we need to make polders."

    Some of the questions that came up:

    - Is this millennial change, or perhaps just decennial?

    - We don't know how big the problem is

    - We don't know what to protect

    - The discussion on critical infrastructure is a bit like a Monty Python scene: "So, apart from e-mail, Skype, Facebook, iPads, iPhones, drains, water, electricity and air-traffic control, what has cyberspace ever done for us?" We don't know what is critical, and what is critically critical. What depends on cyber (eg, the financial sector). And how does cyber depend on non-cyber (eg, the grid)?

    - We cannot count the cost of cybersecurity. We cannot insure against losses. And we cannot sue for negligence

    Everybody here seemed to quote their children. So are we the right people to be discussing this? What is cyberspace? “It's stuff,” says one participant, quoting his kids

    Why is it so hard to understand?....

  • Financial transaction tax in the euro area

    Shooting the bankers, or themselves?

    Sep 17th 2011, 15:42 by The Economist | Wroclaw

    THROUGH the crisis, European taxpayers have bailed out first the banks, and then busted states. So it is little wonder that many governments are reluctant to consider either of the main options to end the euro-zone crisis: opening up the wallet (by enlarging the euro-zone rescue fund), or letting others borrow one’s credit-card (issuing joint Eurbonds).

    Germany and France want somebody else to start paying. And who better to punish than the reckless bankers and speculators who, in their view, caused the trouble in the first place?

    The idea of imposing a financial transaction tax (FTT) has been around since the start of the crisis, indeed for several decades since it was mooted by the late Nobel laureate, James Tobin. But has faced a seemingly insurmountable problem: in a globalised connected financial world, a financial tax has to be global if markets are not simply to shift their operations to where they will not be taxed.

    As Timothy Geithner, America’s Treasury Secretary, repeated to European finance ministers in a less-than-cordial encounter (see previous posting) in the Polish city of Wroclaw this week, the United States opposes the FTT on the grounds that it would raise the cost of capital and weaken the already-fragile economic recovery.

    Undeterred, Germany and France last week called for the tax to be imposed by the European Union alone (see joint letter from the German and French finance ministers here). The European Commission is also supporting the idea, and will unveil proposals in the coming weeks. Michel Barnier, commissioner for the single market, said his proposals would be “technically simple, economically bearable by the financial sector, financially productive and politically just”. He gave no figures for how much money could be raised. 

    Supporters of a more localised FTT would argue that this is an opportunity for Europe to show the way in taking action that is both moral and remunerative. As with emissions-trading to curb climate change, others will follow. Indeed, European officials are already arguing over who should take the proceeds of an FTT: national exchequers, the European Union or a special-purpose European fund to deal with future banking collapses?

    Even so, the idea is running into the firm objections of, among others, Britain. Jacek Rostowski, the Polish finance minister who holds the rotating presidency, said the EU was “very, very divided” on the issue when it was discussed in Wroclaw. In any case, he said, “nobody expects this element to be crucial in our attempt to stabilise the situation, both fiscally and financially.” In other words, the FTT is not worth the trouble it would cause.

    Thus the idea that gathered strength yesterday: a financial transaction tax within the 17 countries of euro zone. “I’m sure that if it’s impossible at the worldwide level, we’ll need to organise that in the European Union, or at least in the euro zone.” To reduce the risk of avoidance, he said, an FTT in the euro zone would have to be imposed at a lower rate than a global tax. In an interview, his German counterpart, Wolfgang Schäuble, supported the idea.

    One might question whether an FTT in an ever-smaller geographical area makes sense, particularly given that it excludes London, Europe’s main financial centre. The pony-tailed Swedish finance minister, Anders Borg had some words of caution:

    We have substantial experience in Sweden. Basically most of our derivative and bond trading went to London during the years we had a financial transaction tax. So if you don’t get a solution that is universal it is very likely to be detrimental for European financial markets. And from the Swedish perspective, we cannot foresee that we would introduce such a tax in our system again.

    The idea of an FTT at 17 raises another intriguing question: might it become the first fracture in the EU from the move to integrate the euro zone to confront its debt crisis? An FTT is no longer a question of monitoring budgets and maintaining fiscal discipline, but a move to integrate taxation, which in turn influences the EU’s single market.

    Britain may consider a FTT at anything other than the global level to be self-defeating. But what of a common base for corporate tax in the euro zone? Even if British tax rates are lower, a simplified and uniform system for calculating and paying corporate tax in the much of the European market may prove attractive to some companies.

    Such issues worry British officials. But for now the greater alarm is over a collapse of the euro, so the British have become among the loudest cheerleaders for euro-zone integration. “Time is running out,” said George Osbone, Britain’s Chancellor of the Exchequer. “They have got to get a grip and deliver a solution to the uncertainty in the markets.”

    If the ordinary citizen has to pay tax on a daily financial transaction, like buying a toothbrush, there can be little moral argument against taxing financial transactions. But at a time of crisis, the question is an FTT might actually worsen the crisis. Might a euro-area FTT not weaken the euro area’s banks? After all, the IMF is urging governments urgently to recapitalise their banks - not to draw money out off them - to halt the spread of contagion from their exposure to the sovereign debt of vulnerable European countries. Two French banks were downgraded this week due to their exposure to Greek debt

    It would not be the first time that Germany and others, in taking aim at the bankers, shoot themselves in the foot. The demand that the financial sector pay for a share of the second bail-out of Greece (which has not yet been approved) caused delay, destabilised the markets and had to be buttressed by offers of government cash to protect the European Central Bank and Greek institutions. It raised comparatively little money. If the euro zone believed the creditors should take the hit, it should have allowed a proper restructuring of Greece’s unsustainable debt. Instead it came up with a fudge that did more harm than good.

    The resentment of bankers, and the desire to protect the taxpayer is understandable. But the grudging and erratic response of the euro zone’s governments has been as much part of the problem as of the solution. The citizen will be placed at ever greater risk unless the crisis is tamed quickly. To do that, two destabilising feedback loops have to be broken. The first is between collapsing banks and collapsing treasuries; the other is between panicking markets and hesitating governments. An EU or euro-area FTT helps with neither. For now, it is a distraction - and could make things worse.

  • The euro and America

    Loose lips sink the euro?

    Sep 16th 2011, 20:04 by The Economist online | WROCLAW

    THERE has been much talk of late that the euro’s debt crisis would force its 17 members into greater fiscal integration, perhaps even towards the United States of Europe (see my column here and here) But its finance ministers are certainly not going to take advice from the United States of America, in the form of Timothy Geithner, the Treasury Secretary, on how to go about pulling themselves together and taming the “catastrophic risks” facing the euro zone

    The difference between European pretension and American reality was apparent on the tarmac of Wroclaw airport: the man in charge of the public finances of the dollar zone came in a big jet; those running the treasuries of the euro zone turned up in countless smaller planes. The euro currency may be unified currency, but its budgets and treasuries are national. Every European minister wants to limit his of her nation’s liability for propping up the euro. So the beast is being confronted with a European shotgun with multiple pellets, not a big American bazooka.

    Mr Geithner made two appearances before the ministers to tell Europeans to start thinking and acting big: once before those of the 17 members of the euro zone, and then later, more emphatically, before the larger gather of ministers from the 27 members of the European Union. In short, his advice was that Europeans had to act more like America: the more solvent needed to co-ordinate fiscal stimulus. And their rescue fund, known as the European Financial Stability Facility (EFSF) needed to increase its firepower by being able to borrow, so it could defend even a big country like Italy.

    One model Mr Geithner suggested is the Term Asset-Backed Securities Loan (TALF) programme that he created in 2008, when still president of the New York Federal Reserve, to re-liquefy frozen credit markets for households and small businesses. Another model, to turn the EFSF into a bank, was proposed by CEPS, a think-tank in Brussels. Both rely on allowing the EFSF to seek financing from the European Central Bank.

    Mr Geithner spoke behind closed doors but, officials say, his comments were fairly similar to the ones he made semi-publicly at a meeting of officials and bankers at a separate conference in Wroclaw. “Of course your financial challenges in Europe are within your capacity to manage financially, you just have to choose to do it,” he declared.

    For Mr Geithner, the euro zone’s crisis is not just a matter of financial stability, but of geopolitics. “One of the starkest ways to emphasize the importance of Europe getting on top of this is that you don't want the future of Europe to rest in the hands of those who provide financing to the IMF.”

    Governments and central banks, he said, “have to take out the catastrophic risk from markets, they have to definitively remove the threat of…cascading defaults [and avoid] loose talk about dismantling the institutions of the euro.”

    His exhortations may not be that different from his comments during a meeting of G7 finance ministers in Marseille last week. But this time in Wroclaw he was guest, not a participant. He was allowed to join the hallowed Eurogroup, which excludes even the current holder of the rotating presidency of European Union's finance ministers, Poland’s Jacek Rostowski, because his country does not use the euro.

    Jean-Claude Juncker, Luxembroug’s prime minister who presides over the Eurogroup, declaring sniffily: “We are not discussing the increase or expansion of the EFSF with a non-member of the euro area.” Didier Reynders, the finance minister in Belgium’s year-old caretaker government, haughtily demanded to know what the US intended to do about its debt and deficit, which is worse than the euro zone’s aggregate numbers.

    The Austrian finance minister, Maria Fekter, was even more dismissive about “this Mr Geithner”. By her account, the German finance minister, Wolfgang Schäuble, had told the American visitor that taxpayers in AAA-rated European countries would not accept the commitment of much more money to salvage weaker euro members, which is why Germany and others were pressing for a tax on financial transactions – something that Mr Geithner rejects. She went on:

    I found it peculiar that even though the Americans have significantly worse fundamental data than the euro zone that they tell us what we should do and when we make a suggestion ... that they say no straight away. I would have expected that if he explains the world to us, he'd listen to what we have to say to the Americans.

    Ms Fekter has a reputation for blunt talking, but one of those present say she did not utter such words to Mr Geithner’s face. Instead, my source tells me, she spoke in the hall only after the Treasury Secretary had gone.

    From the German camp, the word is that Mr Schäuble objects to increasing the EFSF through public guarantees, but he is not opposed in principle of leveraging the EFSF; the resistance to that idea comes mainly from the European Central Bank.

    One small ray of hope is that the ministers agreed to a compromise with the European Parliament on new rules to monitor the deficits, debt and economic imbalances of euro-area members. This might help prevent a future debt crisis, but will do little to resolve the current one, except by showing that the euro zone can, eventually, take action.

    But such meagre confidence will be obliterated by any hint of a transatlantic spat. It was Mr Juncker, after all, who had spoken of the need for “a concerted effort at a global level”. More comically, he declared that Europeans had to show more “verbal discipline” and avoid their usual cacophony. “I insisted with my colleagues to be as disciplined as possible when expressing our views.” Nobody listened to him. Remember: Loose Lips Sink Ships

  • The euro crisis

    Time is running out

    Sep 12th 2011, 18:39 by The Economist | BRUSSELS

    WHEN Russia worries publicly about the financial stability of the European Union, as opposed to the other way around, you know the euro is in real trouble. There is a sense in Brussels that the defenders of the euro zone have run out of ammunition and out of ideas.

    One reason is that the politicians cannot keep up with the markets. The euro zone has yet to implement the decisions of July’s summit, but the next shock wave has already struck. Another is that the performance of Greece under the EU-IMF programme has been so poor that every quarterly assessment to approve the next tranche of loans becomes a cliff-hanger.

    So each episode of market panic is worse than the previous one, the weapons in hand look inadequate, contagion spreads, while governments and institutions lose their nerve.

    The proposed increase in the firepower of the main bail-out fund, the EFSF, will not be enough to protect Italy should it go under, as it has threatened to do in recent weeks. As one German official put it to me: "Italy will have to deal with its problems on its own." The ructions at the European Central Bank exposed by the resignation of its German chief economist, Jürgen Stark, raises concern about how much longer the ECB can keep buying up the bonds of vulnerable euro-zone states. The German constitutional court has not blocked the temporary bail-out system, but appears to have all but killed off the idea for now of issuing joint Eurobonds, the one idea that might have arrested the crisis in the short term (though lots of people think they might make the long-term problems worse).

    German politicians now talk openly of cutting off Greece’s lifeline and letting it fall out of the euro, causing another seizure in the markets, where French banks have now come into the firing line.

    Greece's departure from the euro, if it happens, will be painful for both Greece and the rest of the euro zone, as Jean Pisani-Ferry, director of the Bruegel think-tank, points out. And there is the question nobody can answer: will Greece's exit remove the source of contagion, or ensure it spreads? Until now, nobody has dared test the proposition.

    It is not impossible that the euro zone will be able to muddle along a bit longer: Greece may have done just enough in its latest plan to cut spending and raise revenues to receive the next tranche; the German parliament may be coaxed into approving the July decisions; the revamped EFSF may then be able to take up the bond-buying task from the ECB and a problem may be found to the problem of Finland’s demand for collateral. Then what?

    The situation is so dire that any bit of bad news would easily cause another collapse in the markets. So at the same time as Germany is talking of giving up on Greece, it is also talking about redesigning the euro zone. Done right, a new European architecture may ensure that such a crisis does not recur.

    But as Barry Eichengreen points out, the problem is now, not tomorrow. It will take years to renegotiate and ratify new treaties, even assuming there is no blockage of the sort that beset the Constitutional Treaty. But the euro zone faces critical days and weeks.

  • Bond spreads in the euro zone

    The single currency's medical chart

    Aug 3rd 2011, 18:31 by The Economist online

    THE euro zone's disease has taken a strange turn since the last summit on July 21st. The medicine that leaders prescribed immediately improved the situation of countries in the emergency room, ie, Greece, Ireland and Portugal, which have all received bail-out loans. But it worsened the condition of those outside hospital who had started to fall ill.

    This contradictory effect is apparent from our charts showing the direction of yields on sovereign bonds, which move inversely to the price.

    The “spread” over 10-year German bunds is the standard measure of perceived risk. It is the premium, or additional interest, that markets demand for holding the debt of a euro-zone country compared with the bonds isued by Germany, deemed the safest.

    Until last month's summit, the worry was focused on whether Greece would be able to repay its debts, and whether its sickness would infect bigger countries. Leaders of the euro area decided greatly to extend maturities on Greece's rescue loans and to cut the interest rate it pays. Ireland and Portugal got the same prescription.

    In addition, Greece got a bit of local surgery, in the form of a slight “voluntary” haircut on private creditors. Many think wholesale amputation is what is really needed to save Greece. But for now the aspirin and antibiotics have brought down the fever somewhat, as is apparent in the left-hand chart, Ireland and Portugal are faring better too.

    By contrast, the spreads of Italy and Spain (right-hand chart), already sickly, have continued to rise, reaching the highest level since the adoption of the euro. Why is the cure not working? One reason is that these two countries have not asked for, and have not been given, the medicine of emergency loans, so they are still struggling on their own. Another is that the measures promised to contain the spread of the disease – giving the euro area's main bail-out fund, the European Financial Stability Facility (EFSF) greater powers to intervene early in a crisis (see my earlier posting here) – have yet to be approved by national parliaments, which are on holiday. Finally, even if the EFSF's drugs are made available, there are not enough supplies in stock to deal with an economy as large and indebted as that of Italy. It may not even be enough for Spain.

    The lending power of the EFSF is being increased to its full headline figure of €440 billion. But many think it needs to be bigger still – five times larger, says one leading financial analyst (see here). The bigger the crisis, it seems, the bigger the dose of cash required. But the question is this: as more countries fall ill and are unable to support the EFSF, who will be left to bail out the euro zone? Already questions are being asked about the creditworthiness of France, the AAA-rated country with the highest debt ratio in the EU.

    The measures taken by the euro zone might have had a chance of working had they been adopted six, or even three months ago. But now the infection has got out, and it is fast developing resistance to the standard drugs.

    To help you keep track of the state of the epidemic, we hope regularly to update these charts. Watch this space, and our dedicated page on the euro-zone crisis. Readers might also want to keep tabs on our debate on the future of the euro, which is just ending.

  • Saving the euro

    A bit of breathing space

    Jul 22nd 2011, 17:37 by The Economist online

    Markets may have rallied, but the latest deal still doesn't get Europe out of the woods, say our correspondents

  • The euro-zone crisis summit

    Russian or Belgian roulette?

    Jul 21st 2011, 23:24 by Charlemagne | BRUSSELS

    “WE HAVE shown we are up to the challenge. We are capable of acting.” Such were the bullish words of Angela Merkel tonight, after a nine-hour summit of euro zone leaders agreed a new €109 billion bail-out for Greece, and approved the creation of new tools to fight market contagion around the euro zone (the communique is here PDF).

    Much of the attention in recent months has focused on the “involvement” of private creditors—nobody wants to talk of debt “restructuring”—and whether it would be construed as a selective default by credit-rating agencies.

    But the most certain and immediate restructuring is not of the loans by the private sector, but of those by official lenders from the euro area. The interest on the euro-zone’s portion of the future Greek bailout is being reduced from about 5.5% to about 3.5%. Greece, then, is being allowed to borrow money as cheaply as an AAA-rate country. Moreover, the maturity on current and future loans would be extended from 7.5 years to a minimum of 15, perhaps even 30 years. Were such terms applied to private lenders, credit-rating agencies would have no doubt about calling it, at the very least, a selective default.

     All this is meant to “decisively improve the debt sustainability and refinancing profile of Greece”. Number-crunchers say the effect will be noticeable, but not dramatic. At the end of its rescue programme in 2014, Greek debt will still be worryingly high, they say. What the IMF is most excited about is the commitment “to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes”. In other words, the EU appears to have given Greece, Ireland and Portugal – and any other country that may need to be bailed out – an indefinite commitment of financial support.

    This promise may well be tested when the current Greek programme ends in 2014. Will euro area countries really be willing to provide fresh funds if Greece is still unable to borrow in the bond markets?

    In order to address the threat of contagion, the leaders decided that the main bail-out fund, the European Financial Stability Facility (EFSF), would be made more flexible so that it could fight smaller fires before they became uncontrolled blazes. It would be able to extend short-term lines of credit, recapitalise banks and buy the bonds of vulnerable countries on the secondary market. Many thought the EFSF would need a lot more money to perform these functions credibly, but such calls were rejected.

    Better late than never. Many of these measures were proposed months ago and rejected by Germany and the Netherlands.

    Still, for Nicolas Sarkozy, the French president, this is all a big step towards the creation of a “European Monetary Fund” and, indeed, of a European "economic government". He said there would soon be more proposals to integrate economic policies of the 17 euro area states. He relished the idea of creating a two-speed Europe; agreement at 17 was hard enough, he said; striking a deal with 27 leaders would have been nigh impossible (Britain, too, seems resigned to remaining in the EU’s outer ring. For more on this, see Bagehot’s Notebook).

    And what of the private creditors? The initial mood of relief, even euphoria, that the euro zone had finally done something big to reverse the crisis soon gave way to confusion over the precise scale and nature of the involvement of the financiers. The communiqué said the net contribution of the private sector is about €37 billion, but the figures provided by the banks, EU officials and national delegations are inconsistent.

    The question of “private-sector involvement”—now called PSI—has been the subject of a long arm-wrestling match between Berlin and Frankfurt. To satisfy Jean-Claude Trichet, president of the European Central Bank, any involvement by private creditors had to be “voluntary”; to satisfy the political needs of Angela Merkel, the German chancellor, (and others) it had to be “substantial” (see my previous post here and here).

    The rest of Europe held its breath as the clenched hands swayed one way and then the other. Meanwhile, contagion has continued to spread through the euro zone.

    According to the French satirical weekly, Le Canard enchaîné, President Sarkozy privately vented his frustration with both Mrs Merkel and Mr Trichet. The Greeks were doing the best they could, he said. But the Germans were displaying “criminal” egotism while Mr Trichet had taken up an “extremist” position. “Trichet’s strategy is one of Belgian roulette,” Mr Sarkozy is quoted as saying, “In Russian roulette there is one bullet in the cylinder. In Belgian roulette the whole cylinder is loaded with bullets.” 

    All ideas for PSI proposed in recent weeks—rolling over maturing bonds (a French idea), swapping bonds of new ones with longer maturities (the German preference) or buying back bonds on the secondary market—seemed to collide, in one way or another, with the ECB’s demand that there should be “no selective default”.

    So in the end the decision was to offer creditors a choice of all three, as if a selection of unpalatable options would appear like a choice made freely. A French idea of taking the money from the bankers’ other pocket, by directly taxing the assets of European banks, lasted only a few days. But one senior French source said the threat had helped convince the bankers to contribute substantially. Sweeteners from governments helped too: roll-overs and swaps would be backed by AAA-rated collateral (presumably bonds provided by official lenders) to make them more appealing. Along with the debt buy-back, the Greek debt ratio, currently about 160% of GDP, might come down by about 12% of GDP.

    For all their dissembling about the voluntary nature of the creditor involvement, euro-zone leaders are bracing themselves for these arrangements to be declared a “selective default” by rating agencies. That is why they pledged an additional €20 billion to recapitalise Greek banks, and €35 billion to put up collateral for the ECB to keep providing liquidity to the Greek banks. Adding the €20 billion of funds committed to buy back Greek bonds, this could be an expensive way of extracting a contribution from creditors.

    It was probably out of realisation of the trouble caused by the demand for PSI that the leaders more or less promised not to make a habit of trying to make creditors pay. Greece, they said, was an exceptional case; all other countries solemnly pledged to honour their debts.

    Had Mr Trichet given his approval for all this, as some leaders suggested? That would be too hopeful, but at least the ECB president no longer voiced his objections. He told journalists he had given his advice; it was up to leaders to take or reject it. His words of caution have been rejected in the past, he noted, only to be vindicated by subsequent events. This seems to be a reference to his warning, as far back as October, that leaders should not talk of making creditors pay at a time when markets were jittery (see my recent column).

    Mr Trichet, then, may have put down the loaded gun. Now the euro zone's leaders must play Russian roulette with the markets.

    * This blog has been somewhat reworked after I posted it in haste, as the summit venue was being closed down.

    Read on: More on the emergency euro-zone summit from Schumpeter, Free exchange, and Democracy in America.

    (Photo credit: AFP)

  • The euro crisis

    A substantial problem

    Jul 12th 2011, 16:28 by Charlemagne | BRUSSELS

    AS ministers, officials and journalists stagger out of the Justus Lipsius building tonight, the unofficial word is that European leaders will be summoned here on Friday to finalise the deal that finance ministers could not conclude.

    The statement issued last night was a study in vagueness (see my earlier post), but the outlines of a compromise are becoming clearer: in exchange for a willingness by private bond-holders to support some form of debt rollover for Greece, euro-area members will have to support Greece in buying back its bonds from the secondary market.

    The basis for this deal is the position taken by the banks, as set out by the Institute of International Finance, which said “it would be important to consider possible debt buyback proposals, which could, along with further fiscal adjustment, begin to reduce the stock of debt and help pave the way toward improved debt sustainability.”

    The idea of allowing the main European bail-out fund, the European Financial Stability Facility, to buy bonds on the secondary market—whether directly or, more likely, by lending money to Greece to do it—was ruled out earlier this year. But now it is at the heart of the package deal to be discussed by leaders.

    Yet although the principle of such a compromise has been hinted at, the details are yet to be worked out. How much finance can be raised “voluntarily” from the private sector? The Netherlands, in particular, insists the contribution must be “substantial”, even at the cost of having the move labelled a “selective default” by credit-rating agencies. The European Central Bank is adamantly opposed to this, and the numbers so far have been unimpressive.

    And how much debt needs to be bought back to make a real impact on Greece’s burden? Diplomats say the numbers start at €60 billion ($84 billion) and go up. And if Greece gets extra money to buy up its loans, Ireland and Portugal will ask the same.

    In other words, the amount raised from the private sector may turn out to be insubstantial. And though buying bonds at a discount will crystallise the losses of those who sell them, the money paid to private bond-holders is likely to be substantial indeed.

    On Friday, the day leaders are expected to meet, the European Banking Authority will publish the results of its latest bank stress-tests. Many question the credibility of the tests, particularly whether they fully reflect the danger of sovereign-debt default. But German banks, in particular, say (paywall) they are worried that the revelations will open them up to attack in the markets. European finance ministers said today that transparency about the state of the banks will reduce nervousness in the market, and promised to take any "remedial action" needed to strengthen banks found to be vulnerable.

    European policy is thus oddly discordant: on the one hand finance ministers want financial institutions to take a hit over Greece; on the other they are preparing to shore up financial institutions weakened by, among other things, the Greek crisis. Jacek Rostowski, the Polish finance minister who holds the rotating EU presidency, says there is no contradiction: the two policies involve different banks. The proposition is about to be tested.

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. An archive of print columns can be found here. Follow Charlemagne on Twitter »

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