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Crisis escalates as insurrection breaks German control of Europe
The political dam has broken in Europe. German Chancellor Angela Merkel no
longer has enough allies in the club of EU prime ministers to impose her
hairshirt agenda. Her methodical plans are disintegrating on every front.
For Germany it is a moment of truth. Berlin has put off hard choices since the crisis began
8:57PM BST 08 May 2012
The immediate fate of Greece - and the euro - is in the hands of a boyish
motorcycle Marxist. Syriza leader deal Alexis Tsipras has vowed to tear up
the hated Memorandum, as the EU-IMF "troika" loan package is known.
He showed no sign of backing off as he met his country's president and began
talks on the formation of an implausible Left front. "The popular
verdict clearly renders the bailout null and void," he said.
To those who warn that such defiance means an unstoppable lurch towards full
default, a banking crash and EMU expulsion, he retorts that Greece has the "ultimate
weapon". It can bring down the whole European system if EU leaders
refuse to soften the terms.
This bluff may be called. "Patience among the creditor countries is
running out," said Blanka Kolenikova from IHS Global Insight. Germany's
media says finance minister Wolfgang Schauble is itching to force Greece out
of the euro as a salutary example, sure that Europe is strong enough to
withstand the shock. This, in turn, is an illusion waiting to be punctured.
Arnaud Mares from Morgan Stanley said a Greek exit would set off "massive
deposit flight" from all the vulnerable EMU states. "It could
unravel the single currency altogether."
It is an dangerous moment for Europe and global markets. Greece has no
functioning goverment. It must decide on a series of bond repayments,
starting this week. Tough choices will not wait until fresh elections in
June, should they occur.
The new bonds issued after private investors suffered a 75pc haircut in March
are already trading at levels of extreme distress, with 21pc yields on
10-year debt. The EU deal to end all deals has collapsed after just two
months.
The disastrous chain of events has essentially discredited the entire crisis
policy imposed on Europe by Germany. Combined fiscal and moneary contraction
has pushed much of southern Europe into a deflation "death spiral",
pulling the rest of Europe down with a delay. Even The Netherlands is now in
deep recessoin.
Revolt was inevitable. It has finally occured. The European Commission on
Tuesday called for an immediate investment blitz to stop the downward slide.
This follows hard on the heels of a call by European Central Bank chief
Mario Draghi for a "growth compact". The EU insistutions are
slipping out of Germany's control.
The election of François Hollande in France has radically altered Europe's
balance of power, and popular fury has done the rest across a string of
democracies.
There are signs that Italy may start to tuck in behind France, picking away at
the EU Fiscal Compact. Silvio Berlusconi's People of Liberty party said it
will not back treaty ratification unless it includes eurobonds and turns the
ECB into a lender-of-last-resort. The party rebuked Italy's premier Mario
Monti for behaving as "Germany's representative".
The party's abrupt shift follows an electoral rout over the weekend in North
Italy, where anti-euro maverick Beppe Grillo won 20pc of the vote in Parma
and 15pc in Genoa.
Mr Monti cannot push the treaty through without Mr Berlusconi's blessing. The
carefully-crafted plans for ratification in Berlin and Rome on the same day
are in tatters.
Mrs Merkel said she will embrace Mr Hollande with open arms but on policy
substance she has carried on as if the insurrection never happened. "The
fiscal pact is not negotiable," she said, insisting that EU treaties cannot
be reopened once parliaments have begun to ratify. This is not true. The
European Constitution was abanondoned after France and The Netherlands voted
"No" in referendums in 2005.
Berlin hopes to assuage Paris with a beefed up role for the European
Investment Bank and a growth compact, perhaps tacked on as an annexe to the
fiscal treaty. Officals at the Kanzleramt think Mr Hollande's rhetoric was
campaign hot air, and that he will switch tack like German Social Democrat
Gerhard Schroder a decade ago once in office.
This may be a misjudgment, failing to catch the mood of fury in Europe. Mr
Hollande was emphatic in his victory speech. "My mission is now to give
Europe growth, jobs, prosperity and a future. We are not doomed to austerity,"
he said. They may call him "Flanby" in France after a brand of
caramel pudding but his mildnesss disguises a steely side, and his Socialist
base is not to be trifled with.
For Germany it is a moment of truth. Berlin has put off hard choices since the
crisis began. It has refused eurobonds or budget transfers, stepping back
from the Rubicon of fiscal union.
Mrs Merkel has insisted on austerity and reforms alone, imposing the full
burden of adjustement on the weaker states. She has brushed aside arguments
the EMU's crisis is in essence a North-South imbalance in trade and capital
flows that cannot be corrected in this fashion within a currency union.
Her government has ignored warnings that simultaneous contraction in the whole
of southern Europe - without offseting monetary stimulus or expansion in
North Europe - can only lead to a replay of the Gold Standard errors of the
early 1930s.
This phase of the crisis over. Now Germany itself will have to adjust.
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