Euro End Game Begins

Jose Manuel Barroso adjusting his glasses

It is beginning. The Euro end game is upon us. Last night President Hollande said at the G-Empty summit in Los Cabos that the bail-out fund should be used to ease the cost of Spanish and Italian borrowing. This is leader-speak for telling us all that the contagion that started with Greece and spread to Spain has now reached Italy.

Yesterday, European Commission President Manuel Barroso told a Canadian member of the press that he did not need lessons in either democracy or how to handle the economy. Evidence would suggest that he needs lessons in both and might also consider turning up for an ethics class on humility. Indeed, the most laughable part of Barroso’s statement in Los Cabos was to suggest the European Commission is “transparent.” The Commission makes Cardinal Richelieu look like a Freedom of Information commissioner.

The simple, sad fact is there is now nothing to support the Euro but smoke and mirrors. And, whilst some structural economic reforms are beginning in southern European countries they are nothing like deep and fast enough to reassure the all-important bond markets. Spain yesterday just about succeeded in selling more than €3bn of treasury bonds at an inflated price simply to meet the interest payments on its national debt. In other words more debt is now being used to fund greater debt, and we all know where that leads.

What Barroso’s comment reveals is four sad truths. First, the President of the European Commission refuses to face reality. Second, the crisis has exposed the innate structural flaws of the Euro and the debt-craziness of many European governments. Third, that Barroso and the other cosseted, unelected members of the Euro-Aristocracy get very irritable when members of the peasantry ask them perfectly reasonable questions. Finally, and most shocking, there is still no master plan to prevent this crisis turning into a disaster.

The so-called ‘Gang of Four’ charged with coming up with a ‘plan’ hardly inspire the vital confidence – be it in the markets or me. Barroso is there, along with EU ‘President’ Herman Van Rompuy; Luxembourg PM and Euro-fanatic Jan-Claude Juncker, who is also head of the Eurogroup; and European Central Bank President Mario Draghi. Between them they have the electoral mandate the equivalent of a small English town, but are effectively crafting Europe’s future. This will include fiscal and banking union and no doubt some steps towards an anti-democratic political union – something a range of recent polls has shown a majority of European citizens now to be against. Even if one agrees with such steps it will all be far too late to influence this crisis.

The real power brokers are of course utterly divided. Chancellor Merkel seems to be prepared to invest in a firewall but only one that surrounds Germany. Fat chance. President Hollande is discovering that the next and catastrophic debt storm will hit France. Prime Minister Cameron is a bit-part player of a bit-part EU country who preens and postures but who has next to no influence. He even had to take Norwegian PM Stoltenburg to a recent Berlin-meeting with Merkel just to get in the door. How humiliating is that?

To get a handle on the scale of the disaster confronting Europe (and increasingly the rest of the world) I spoke yesterday with a Swiss banker friend of mine. His opening line was sobering. The bail out of Spain and Italy would alone cost some €800bn or the equivalent of all the American debt China has bought over the past twenty years. Add the loss of Spanish and Italian contributions to the bail-out mechanisms and the total is in fact €980bn, the cost of which will fall mainly on the northern European taxpayer. The Spanish banking sector alone needs at least €400bn at least just to stay afloat, not the €100bn given away without strings at the behest of Mario Draghi (a very dangerous precedent if ever there was one). The €700bn that makes up the European Financial Stability Fund and the European Stability Mechanism is effectively spoken for to cover Greece (which makes Hollande’s Los Cabos claim somewhat academic).

My Swiss friend told me the first sign of real failure will be a banking collapse that cannot be contained. Once the banks begin to go sovereign debt will explode and after panic bank nationalization across Europe sovereign debt defaults will follow and the mother of all financial crises will ripple round the world.

The blame game is already underway. That is what politicians do when the extent of their failings is about to be exposed. Last week’s lame claim by Chancellor Merkel that she is not a “miracle worker” merely mirrored Barroso’s ‘nothing to do with us, guv’ Los Cabos comment.

Julian Lindley-French is Eisenhower Professor of Defence Strategy at the Netherlands Defence Academy, Fellow of Respublica in London, Associate Fellow of the Austrian Institute for European and Security Studies and a member of the Strategic Advisory Group of the Atlantic Council. He is also a member of the Academic Advisory Board of the NATO Defence College in Rome. This essay first appeared on his personal blog, Lindley-French’s Blog Blast.

Photo credit: Reuters Pictures

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