“I’m fast losing the will to live in writing about the eurozone’s seemingly interminable crisis,” says Jeremy Warner on Telegraph.co.uk. European leaders had promised to produce a ‘grand bargain’ to solve the eurozone crisis at their March summits. But a recent meeting proved yet another disappointment. Meanwhile, Portugal looks set to be the third country, after Greece and Ireland, to need a bail-out.
At least Eurozone leaders have agreed on the European Stability Mechanism (ESM), the rescue fund that will replace the current arrangement (the European Financial Stability Facility, or EFSF) in 2013, says Wolfgang Munchau in the FT. But that won’t help sort out the current crisis. One step in that direction, doubling the funding of the EFSF to e500bn, has had to be delayed until June. There is an election in Finland next month, and the government is trying to bolster its eurosceptic credentials to thwart the rise of a populist anti-EU party. So it has refused to sign up to a bigger EFSF.
The next domino to fall
The EFSF should have enough money to rescue Portugal, says Charlemagne on Economist.com, but it probably doesn’t have enough to help Spain, “if, as many expect, it is the next to be infected”. Portuguese bond yields have hit new euro-era highs, with the ten-year interest rate at almost 8%, after the government fell last week. The prime minister resigned after the opposition voted down the latest austerity package.That casts doubt on Spain’s ability to cut debt, while it also faces having to refinance e10bn of maturing debt in April and June. It could be shut out of the market by jittery investors, while soaring yields are “sending its public debt on an unsustainable trajectory”, says Deutsche Bank. “Portugal is moving ever closer to an inevitable bail-out,” concludes a JP Morgan note. To add to the gloom, ratings agency Standard & Poor’s downgraded Portugal’s debt to near-junk status this week. As Portugal’s rescue would be partly undertaken with a supplementary EU-wide fund, Britain may have to help pay for it.
Problematic politics
A more general problem for the eurozone is that politics looks ever more likely to complicate or deepen the crisis. In the periphery, populations and politicians fed up with austerity are likely to become increasingly restive, especially since they are caught in “debt traps”, says Heather Stewart in The Guardian. If growth isalready very weak or negative, the danger is that austerity makes things worse by further undermining the economy and thus spurring yet more borrowing, creating a vicious circle. The upshot is unsustainable debt and default. Greek economist Costas Lapavitsas reckons it won’t be long before the Irish follow Greeks onto the street.
Meanwhile, Germany, the eurozone cash cow, is becoming increasingly reluctant to “act as the anchor of Europe”, says Bronwen Maddox in The Times. Last weekend’s state elections were another setback for chancellor Angela Merkel, and “when in doubt”, her “instinct is to play safe and not alarm” the largely eurosceptic electorate, notes Quentin Peel in the FT. So Germany’s commitment to further bail-outs is another source of uncertainty.
Eurozone still in denial
The basic problem, as Warner points out, is that it has been obvious for ages that some countries in southern Europe are heading for a default. Yet “denial remains the order of the day”. Leaders are worried that a default would destabilise the European banking system, given the close links between Europe’s banks and their high exposure to the periphery. But the risk can be lowered if policy-makers prepare the ground with “an orderly restructuring” and plans to recapitalise banks. “Some kind of ordered default seems preferable to the present band-aid approach to the crisis,” says Warner. You can’t patch up a broken system indefinitely. “Better grasp the nettle now.”