Sunday, March 4, 2012

EU Spiralling

Reports from wire services across Europe this week indicate Greece is responding to demands for austerity, Ireland is balking at continuing to support the union and Holland may be trying to be a good sport. All of which seems peripheral to the needs and demands of Germans whose work is keeping the union financed. That and money printing.

The recently agreed European Union treaty is about to get its first popular vote test, courtesy of Ireland. Irish Prime Minister Enda Kenny told parliament today that he would be calling a referendum before summer on the new treaty.

This is not something the Irish government, or indeed any EU government, wanted to have happen. That’s no surprise really, given that the people are the ones who are suffering under the austerity rules ordered by the EU, and given a chance to express their opinion are likely to reject the new treaty.

The Irish people rejected the first EU treaty change in 2007, forcing the continental government to make alterations before the Irish accepted the second offering. The country was basically forced to accept the second version in order to avoid a bankruptcy. Ireland’s former prime minister, John Bruton, has cautioned that a rejection of the new treaty could force the country out of the eurozone.

Under the recent EU treaty, rules governing sovereign debt limits must be embedded in each Eurozone country’s own constitution. The UK rejected the idea out of hand, which was no big deal because it is not a member of the eurozone. Ireland’s constitution, however, requires a popular vote before any transfer of sovereign power to another government, such as the EU. The Irish government wanted to avoid a referendum because the current austerity measures are hammering Ireland, and the handwriting is pretty much on the wall regarding the outcome of such a vote.

And it’s not just the weaker economies like Ireland, Greece, Portugal, Italy, and Spain that would face popular opposition to the new treaty. Finland, Slovakia, Denmark, Sweden, and the Czech Republic have also indicated opposition to the requirement that budget targets be incorporated into sovereign constitutions. A majority of 12 of 17 eurozone members is needed to adopt the treaty and its budget targets.

Germany has pushed hardest for targets to be included, essentially demanding targets in exchange for continued financial support for EU bailout programs. French President Nicolas Sarkozy has already rejected the idea of putting the treaty to a vote if he should win re-election in the two-round process taking place in April and May.

If Ireland votes to reject the budget rule, the EU and the euro itself could be in serious trouble. The recent agreement with Greece, and the resulting improvement of hopes for an economic recovery in Europe could go out the window if Ireland rejects the new treaty. That would not be a good day for the EU.

Growing public hostility in Germany to euro zone bailouts could make it harder for Merkel to agree to an increase in the currency bloc's financial firewall, which major economies are demanding as a condition for giving the IMF more money to fight the fallout from the European crisis.

However, Dutch Finance Minister Jan Kees de Jager said that a decision to increase the size of the European rescue fund may be made in April during the IMF's spring meeting.

Informal contacts had been held which would allow a decision on an IMF contribution, he told parliament. "That suggests that the one country, which has so far not made this step, may decide before that date," he said, referring to Germany's refusal so far to expand the planned European Stability Mechanism (ESM).

Two senior German conservative lawmakers said the coalition was open to discussing in March proposals to combine the current temporary EFSF euro zone rescue fund with the permanent ESM warchest to raise the safety cushion to 750 billion euros.

In a case brought by two opposition MPs, the court said a nine-member sub-committee created to approve urgent action by the bailout fund was "in large part" unconstitutional because it infringed on the rights of other deputies.

The judges said the panel may approve price-sensitive debt purchases on the secondary market by the EFSF bailout fund, since confidentiality was essential in such operations. But they denied it the power to authorize loans or preventive credit lines to troubled states or for the recapitalization of banks.

While not a show-stopper, the decision means parliamentary deliberations on future rescue operations could be slower and more cumbersome, since the full 41-member budget committee or the entire 620-member lower house will have to decide.

Euro zone leaders have insisted that Greece is an exception and after bailouts for Portugal and Ireland, they do not expect other members of the 17-nation currency area to require assistance from their rescue fund.

Portugal passed a third compliance review by international lenders of its bailout program on Tuesday and said it would not need a second rescue like Greece despite a deeper than forecast recession.

However, many economists say Lisbon is likely to require increased aid, and the chairman of euro zone finance ministers, Jean-Claude Juncker, has acknowledged that Athens may also need further assistance at a later stage.

Greece approved bitter new austerity measures on Tuesday, slashing the minimum wage and chopping pensions as it began implementing measures demanded by the EU and IMF in return for its latest 130 billion euro rescue package.

There are concerns too about Spain, which announced on Monday that its 2011 public deficit was 8.51 percent of gross domestic product, far higher than the 6 percent target set by the European Union and above a preliminary estimate of 8.2 percent from the new centre-right government.

That made it even less likely, against a backdrop of recession, that Madrid will be able to reduce the deficit to 4.4 percent of GDP this year, as promised to the EU.

The European Commission said it was awaiting an explanation from Spain for the budget slippage and was not considering granting it any flexibility to reach this year's deficit target.

The ECB temporarily suspended the eligibility of Greek bonds for use as collateral in its funding operations and said national central banks would have to provide banks with liquidity using an emergency measure.

The move, which was expected but not so soon, was triggered by ratings agency Standard & Poor's cutting Greece's long-term ratings to "selective default" after Athens launched a bond swap to lighten its debt burden.

The swap is intended to wipe some 100 billion euros off Greece's 350 billion euro debt pile, reducing it to 120 percent of GDP by 2020, and forcing private debt holders to take a 53.5 percent loss on the face value of their bonds.

Anticipating such temporary downgrades, the euro zone and ECB had struck a deal whereby Greece would receive 35 billion euros in support from the EFSF rescue fund to enable the central bank to continue accepting Greek bonds and other assets underwritten by Athens in its lending operations. But the ECB action came before the EFSF funds have been activated.

S&P's head of European sovereign ratings, Moritz Kraemer, said the downgrading of Greece's long-term ratings to 'selective default' could well be short-lived but there was a risk Athens could fall back into default later.

"It's a distinct possibility that this will be a short default which will be cured," Kraemer told Reuters Insider television. "The more interesting question is not when it will be cured but whether it will be the last one."

When assessing what rating to give Greece in the future, S&P would look at the political environment, the growth outlook and the remaining debt stock. "We think that on all three fronts there are huge question marks," said Kraemer.

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