by Michael Roberts
So, under huge pressure from Italy, Spain and France, German
Chancellor Merkel capitulated. Spain and Italy got the right to ask for
money from the European funding mechanisms, the EFSF and the upcoming
ESM, to recapitalise their banks and support their government bonds without having to enter a dreaded Troika programme of austerity that has already been imposed on Greece, Portugal and Ireland.
Germany did not want to allow this, but Merkel eventually agreed
because as Italian prime minister Mario Monti probably put it to Merkel
in the small hours: if you don’t agree to provide funding now, Italian
and Spanish bond rates will rocket; we won’t be able to fund our debt in
financial markets; and at the next meeting, you will be talking again
to Silvio Berlusconi and he’ll be saying that either Italy will leave
the euro or Germany must!
Of course, what has been dragged out of Germany only provides debt
and bank funding for the year ahead. The EFSF/ESM has about €700bn in
the kitty and if the bank recapitalisation in Spain is to cost €100bn
and sovereign debt support is to cost another €1trn, all these funds
will soon be gone. The Euro leaders also agreed to set up a single
European banking supervisor of all Eurozone banks by the end of the
year. If that happens, then Germany could then agree to allow the ESM
to have a banking licence. If that happens, it would mean that the ECB
could lend the ESM money just like it does for any other bank, for up to
three years. The door would be open to fund Italy and Spain infinitely
and indefinitely, and not in dribs and drabs as under the Troika
programmes. We shall see how that prospect goes down in the German
parliament, the German constitutional court and the German electorate
over the next few months.
But it is possible that ECB funding for the Eurozone’s government
debt is on its way. This is not proper mutualisation of all Eurozone
debt i.e. sharing out the burden of each country’s public debt among all
states (as happens in federal USA, federal Canada or federal
Australia). But, in effect, with the ECB taking on the burden, it would
soon amount to the same thing – something Merkel told us would “not
happen in her lifetime”.
And what does this mean for the small Eurozone capitalist states who
were forced into vicious Troika programmes that have reinforced the
collapse of their economies? The new pro-bailout Greek government is
looking for a relaxation of its fiscal targets and cheaper terms for
loans, and so will Portugal and Ireland. They will argue: why should
just the big boys who would have brought about the break-up of the euro
get easy money funding and not us?
The planned moves to ‘more Europe’, with tighter fiscal controls and
eventual ‘fiscal union’ have been put off for discussion until later in
the year. Instead, pressure and panic have forced Germany to relent and
allow money to be transferred via the current emergency mechanisms and
probably through the monetary tap being opened by the ECB. This means
that Merkel still wants to save the euro and just hopes that the cost to
Germany can be minimised.
This deal does nothing to restore economic growth, jobs and real
incomes for the majority in Europe. The proposed ‘growth package’ of
€120bn, or about 1% of EU GDP is a joke. Most of these funds were
already in the EU budget, but just not used. The European Investment
Bank will be able to raise more debt to fund infrastructure projects,
but this is not going to happen overnight and will be subject to all
kinds of typical banking conditions. In the meantime, Greece’s economy
is contracting at a 9% rate, Spain’s at 4% and Italy’s at nearly 3%.
Unemployment is now near 20%, with youth unemployment close to 50% in
all three countries. The depression in Europe is intensifying.
All this deal does is to give more taxpayer’s money to failing banks
in Spain and reduce somewhat the cost of servicing public sector debt.
The ultimate question of whether the Eurozone can move towards a proper
fiscal and monetary union or will break up under the pressure of debt
and depression remains open.
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