Slugger O'Toole

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Euro crisis: “Europe has been producing its usual cacophony of voices in the past few days”

Tue 24 May 2011, 9:20pm

BBC Europe editor, Gavin Hewitt, has been looking at Spain in the aftermath of defeat for the prime minister José Luis Rodríguez Zapatero’s ruling socialist party in municipal and regional elections.  From Gavin Hewitt

But nerves are back. In weekend elections the governing Socialist party took a thrashing. Even in strongholds like Seville and Castilla-La Mancha it was defeated. There is a pattern emerging in Europe. Given a chance, the people turn on the incumbents.

In Spain national elections do not have to be held until next March, but Prime Minister Zapatero is a lame duck. If further reforms are needed he lacks the authority to implement them.

What has really unsettled observers, however, is what the new conservative administrations will find when they start peering into the accounts in the town halls and regional governments across the country. There are stories of undisclosed debts, of payments not made. This is precisely what happened after elections in Catalonia. The deficit was found to have been much greater than acknowledged.

If that were to happen on a significant scale it would be easy to imagine a crisis. The markets are very sensitive to hidden debts. There could be tension between central and local government.

And, while the UK coalition government’s business secretary, Vince Cable, has been saying that he is “sure” that Greece will negotiate a rescheduling of their debt, the rating agencies don’t seem to think that will be a “soft” option.  A point picked up by the BBC’s Stephanie Flanders

First, we’ve learned that there isn’t going to be a ‘soft restructuring’ of Greek debt any time soon – probably ever. It will be ‘hard’ or it will not happen at all.

European officials have been toying with this kind of ‘re-profiling’ idea for several weeks (I discussed it first here on 9 May). This has always seemed a long shot. As I said, if there were an easy way to make investors share the burden of bail-outs without triggering a market panic, you’d think they’d have found it before now.

It turns out, surprise surprise, there isn’t one. As Fitch confirmed in its latest downgrade of Greek sovereign debt on Friday, any restructuring of Greek debt – even if it didn’t affect the principal – would, in their view, trigger a credit event, and a ‘default’ rating from the likes of Fitch.

And, lest we were in any doubt, it turns our that such an event would also prompt the European Central Bank (ECB) to stop accepting Greek sovereign debt as collateral for ECB loans to Greek banks. Both the new Bundesbank President J Weidmann and the German member on the ECB board, Jurgen Stark, made that clear last week – apparently with the full support of the ECB President Jean-Claude Trichet.

Stephanie Flanders ends with this thought

If Spain tips into crisis in the next few months, the odds are that it will be because of something nasty happening to balance sheets at the local level which shocks the markets – in Donald Rumsfeld’s phrase, that is the ‘known unknown’ that makes everyone nervous.

Finally, and perhaps most important, we’ve learned that eurozone leaders have still not learned to speak with one voice. Whether it’s about Greece, ‘soft restructuring’, or the chances of Ireland extracting softer terms for its emergency borrowing, Europe has been producing its usual cacophony of voices in the past few days, none of them saying quite the same thing.

As ever, the eurozone could do itself a huge favour by simply learning to speak with one voice.

Interestingly one of those voices has been the President of the Euro Group of finance ministers, Jean-Claude Juncker.  And the Irish Times’ Arthur Beesley picks up on the Luxembourg Prime Minister’s recent, unreliable, statements.  From the Irish Times article  

This dubious approach raises legitimate questions over his own credibility. Henceforth, there would be ample reason to disbelieve any denial from his office on any sensitive topic. Given the important post Juncker holds in the euro zone, that is no small thing.

Only a fool would believe that politicians never lie and always tell the whole truth. But trust flows from transparency. Accordingly, official observers of the Luxembourg affair were astonished at the lack of a simple “no comment” in response to queries about the meeting.

Still, the denial was in keeping with Juncker’s own beliefs about market turbulence. The previous month in Brussels, he indicated to a public forum that leaders need not tell the truth in such circumstances.

“When it becomes serious, you have to lie,” he said.

At the same meeting, Juncker said economic and monetary policy should be discussed only behind closed doors in “dark secret rooms” in order to prevent dangerous movements in financial markets. “I’m ready to be insulted as being insufficiently democratic, but I want to be serious.”

In European circles, inevitable questions arose about the wisdom of making public speculations of this nature. Juncker, who was finance minister for six years before he became prime minister, was one of the main architects of the Maastricht Treaty. After 22 years at the heart of European economic policy, he is held in immense regard by his many admirers. But some are wondering whether his political grip is loosening.

Frau Bundeskanzerlin has, of course, already said “Nein” to debt restructuring/rescheduling/default.  At least until 2013.

And with, as Gavin Hewitt said, “the people turn on the incumbents” across Europe, the possibility of the eurozone speaking “with one voice” seems more remote than ever.

To repeat myself, again.

As I said previously, the question is, do they still all know what to do?  Even if they can’t get re-elected once they’ve done it?

Or will domestic political pressures, in Ireland and elsewhere, hold sway?

And with what result…?

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