Euro crisis: “everything those leaders have done, after large amounts of dithering, has ended up making the situation worse.”

That’s the BBC economics editor Stephanie Flanders quoted above, by the way.  Which brings me back to Thursday’s emergency summit called by European Council president, Herman Van Rompuy

“Our agenda will be the financial stability of the euro area as a whole and the future financing of the Greek programme,” said Mr Van Rompuy in a brief statement last night. [Friday 15th July]

Perhaps…  But Frau Bundeskanzlerin, who reportedly wasn’t as keen on the summit being called, has been playing down expectations today

A meeting of euro zone leaders on Thursday will not be the final step in the resolution of Greece’s debt crisis, German Chancellor Angela Merkel said today, damping expectations that European leaders will be able to draw a line under the turmoil at the July 21st summit.

“Those who want to take political responsibility, and that’s what the government wants and takes seriously, know that responsibly there won’t be one spectacular step” this week, she said at a joint news conference with Russian president Dmitry Medvedev in Hanover.

“It’s entirely about creating a controlled, composed process of gradual steps and measures.”

And as the BBC reports

German Chancellor Angela Merkel has played down the chances of Thursday’s emergency eurozone summit resolving Greece’s debt crisis.

She told a news conference that there would not be anything as “spectacular” as a restructuring of Greek debt.

The meeting will attempt to agree a second bail-out of Greece in a hope of calming financial markets and stop contagion spreading.

She said: “Thursday will help in this, but further steps will be needed.”

At the weekend Mrs Merkel indicated that she may not attend the meeting unless there was a likelihood of a concrete deal on a second Greek rescue.

Now that might not exactly contradict the stated intentions of the Euopean Council president, but when the approach of EU leaders to date has been characterised as “papering over and pretending”, or “subterfuge and muddling through”…

That’s when it hasn’t become so serious that “you have to lie”…

Back to BBC economics editor Stephanie Flanders,

Nearly everything that eurozone leaders have done in response to the euro crisis has been done in the name of preventing contagion.

But guess what. It’s already here. Because (nearly) everything those leaders have done, after large amounts of dithering, has ended up making the situation worse.

In the past 24 hours we have seen: Spanish and Italian bond yields head over 6%; the value of shares in three of Britain’s leading banks fall by 6-7% yesterday, as a result of European stress tests which they passed; and the gold price hit an all-time record of $1600 per ounce. (British bank shares have since gone back up again).

Phew. It makes you wonder where we’d be now, if Europe’s leaders had NOT been so focussed on limiting contagion.


Stephanie Flanders also picks up on comments by Jean-Claude Trichet, head of the European Central Bank, to explain the implications “if Jean-Claude Trichet makes good on his threat to stop accepting Greek debt as collateral”. And, possibly, even if he doesn’t.

And just to be clear, ECB losses will ultimately have to be borne by its shareholders – the European governments.

The amounts involved are not small, especially if you look beyond Greece. Greek total bank deposits are roughly equivalent to 80% of government debt. Portuguese bank deposits come to more than double the amount of government debt.

Add them all up, the bank deposits of the five periphery countries come to about 230% of German GDP. Is it really plausible that German – or Finnish – taxpayers would consent to taking on even a fraction of those liabilities? Implicitly, that is the question that European leaders need to consider in the run up to the summit.

In the event of a serious run on all Greek banks, there would be three possibilities: eurozone governments agree to guarantee all of those liabilities; or the ECB could cut off funding, forcing the collapse of the Greek financial system; or the eurozone could decide to allow or force Greece to get out of the euro.

As Bootle and May point out, all of these options are bad. But it’s not clear that Greece leaving the euro would be the worst, for Greece or for the rest of the eurozone.

None of this is to say that Greece is about to leave the euro. But you can now see how an apparently technical dispute with the ECB, over the nature of default, actually runs right to the heart of the problem.

Critics say that the ECB is forcing a crisis, by insisting that it will cut off funding for Greek banks in the event of a default. But the reality is the crisis is already here. What the ECB is doing, rather, is forcing governments to decide how it is going to be resolved.

The leaders who will meet in Brussels on Thursday still have the power to decide whether this crisis is going to end with much greater integration and burden-sharing between the governments of the eurozone – or a dramatic break-up. But they are increasingly losing control of the timing.

And Andrew Lilico is back at the Telegraph blog, explaining his alternative scenario

…the organising concept of the European Community has, since the outset, been “ever closer union”. Solving the eurozone crisis by deepening those ties further is a natural extension of what already exists. “Solving” the eurozone crisis by ending the European Union and so moving away from a form of politico-economic governance the core eurozone countries have become used to for 60 years is, in core EU member state terms, what is truly “unthinkable”.

If it comes down to this: some form of even deeper political union amongst the core six Members of the EU, plus some hangers-on; or the end of the European Union or any similar scenario in which the political organisation of the core six members becomes separated. If saving the euro actually seems feasible by some form of even deeper political union (which is by no means obvious), I believe we can be confident that it will be deeper political union, not eurozone collapse, that will be truly inevitable.

To repeat myself [Again?! – Ed].  For supporters of the “European Project”, the longer-term options are stark.